How can Sri Lanka’s democracy be gender-inclusive?

Covered in the Ceylon Today, Colombo Telegraph, Lanka Business Online and Economy Next

By Sathya Karunarathne

Sri Lanka’s general election dawned at a crucial time of extreme uncertainty and precariousness. The island’s political, social, and economic spheres have been dismantled by an unexpected global pandemic that drove the country into a political limbo with the dissolving of the parliament. The task of untangling the island from its woes has now been handed over to a male-led parliament elected by the general public ostensibly upholding the true values of a  democracy. In contrast, Sri Lanka’s female demographic which constitutes 52% of the population is left underrepresented in parliament, forgotten, and deprived of positions of power and access to the national decision making and policy implementation process, yet again. 

At present, Sri Lanka is ranked 182 out of 193 countries on the inter-parliamentary union of rankings which assesses the percentage share of women in national government. In the previous parliament 13 legislators, or rather a handful of 5.8% of 225 MPs represented the voice and needs of 52% of the population. Moreover, there was only one woman under the age of 40 in parliament that represented the needs of young women.  The newly elected parliament boasts a grand total of one cabinet and two-state female Ministers with five more female members of parliament being elected by popular vote. Moreover, SLPP, SJB, and NPP have collectively appointed four female representatives through their National Lists. 

The World Gender Gap Report published by the World Economic Forum ranked Sri Lanka amongst the top 20 countries in 2006. However, Sri Lanka has drastically slipped in the rankings and has descended to be ranked 102 out of 153 countries in the year 2020 despite performing well on other indicators such as health and education. In 2006 Sri Lanka ranked 84th on the economic participation and opportunity sub-index while in 2020 we ranked 126, slipping 42 places. Moreover, wage equality for similar work has degraded by 27 places since 2006 from being ranked 55 to being ranked 82. Further, Sri Lanka has performed poorly on the political empowerment sub-indicator ranking 7 in 2006 and 73 in the year 2020. Even though Sri Lanka has ranked 9 on “years with a female head of state” indicator it should be noted that the index takes into consideration countries with the most years of a female head of state in the past fifty years. As this is a large time frame it does not necessarily reflect consistency in female political empowerment, especially in the Sri Lankan context. 

Why does female representation matter?

The World Economic Forum states that women are underrepresented in the political sphere globally, with women only making up 23% of national parliamentarians. This severe underrepresentation has an empirical correlation with policy choices and adverse consequences in women’s and children’s welfare. A study by the World Economic Forum addressed this issue by analyzing gender representation in local municipalities and the provision of public childcare in Bavaria. To assess the effect female councillors would have on public childcare a study was carried out to compare the expansion of public childcare across municipalities that have similar characteristics but differ in their share of female councillors. Results emphasized that one additional woman in the local council accelerates the expansion of public childcare by 0.4 spots per 1,000 inhabitants or by 40%. Moreover, a comparison of over 7,700  minutes of council meetings displayed that one additional woman translates to child care being spoken of more frequently and that it creates the ambiance for other female councillors to voice their opinion confidently and to play a more active role in the process of policymaking and implementation.

These findings are relevant to Sri Lanka now more so than ever as Sri Lanka has seen a spike in the number of child abuse and violation of child rights reported in the year, highlighting the lack of female perspective in the policymaking process. 

Furthermore, Sri Lanka is no stranger to policies and laws that are excruciatingly gender discriminatory. Marital rape being legal under the penal code which dehumanizes the “role and duty of a wife”, the Muslim Marriage and Divorce Act (MMDA) of 1951 that has a multitude of discriminatory provisions with regard to marriage, divorce, maintenance, inheritance, property rights and access to justice for Muslim women, discriminatory principles in the Kandyan law on divorce and inheritance, limitations on property rights applicable to women in Jaffna under the Tesawalamai law, mammoth taxes on menstrual hygiene products that are considered a luxury despite 4.2 million menstruating women, 14 year justice struggle for victims of rape, lack of incentive provided for women to enter into the labour force resulting in only 34.3% of females being economically active , failure and delay of the government in midst of the COVID 19 pandemic to repatriate migrant workers that mostly comprise of women who are Sri Lanka’s highest foreign exchange earners, lack of a monitory body/mechanism to assist families and children of migrant workers are just a few amongst a host of gender insensitive and discriminatory laws and policies that haunt the quality of life, day-to-day activities, and even threaten the very lives of women across the island. It takes no expert to identify that much-needed reforms have been conveniently pushed under the rug over the years due to lack of female perspective and representation in positions of power and parliament where laws and policies are debated and solidified. 

Laments of local females aspiring to shatter the glass ceiling 

A glance at the number of female contestants from each major party in the recent general election depicts the difficulty female expectants face in being nominated as a candidate. With the motive of addressing these issues and ensuring women representation in local government, Local Authorities Elections (Amendment) Act, No. 1 of 2016 was introduced which presented a 25% mandatory quota for women. The practicality of abruptly coercing women into positions of power was lost in this attempt. Candidates were provided with zero training and preparation to enter into local government, despite years of convincing them that their expertise lies within the boundaries of a kitchen. Moreover, the lack of preparation in this regard resulted in priority being given to relatives and close associates of politicians overlooking qualified and competent candidates.  

Since Mrs. Bandaraniake’s debut, Sri Lanka’s lineage of female leaders has repeatedly painted a dramatic chronicle of the devoted woman, who steps out of their male counterpart’s shadow in the case of his demise to dutifully carry on the legacy of the deceased. This narrative does not only rob these females of an authentic career and individuality but also leaves a permanent imprint of pedigree that doesn’t necessarily reflect the aspirations of the average woman. Moreover, this phenomenon compromises the quality of leadership as overnight shifts to the political sphere has a certain degree of risk attached to it.

Women continue to be severely underrepresented due to the unequal access to finances and resources needed to successfully seek nominations and to participate in electoral campaigns. According to research conducted by UN Women in 2013, over 80% of respondents identified the lack of access to funding as one of the biggest obstacles for women to participate in a political competition (Ballington and Kahane, 2014). Politics and campaigning is a sphere dominated by big money and more often than not the economically disempowered woman is ruled out from this rich man’s club. According to Lihini Fernando, UNP’s municipal councillor from Moratuwa it costs Rs.25 million roughly to campaign throughout the district. Strong female candidates such as Rosi Senanayake too have stated that financial pressure is a huge burden carried by women that are less likely to have sponsors. Moreover, females employed in the corporate sector, activists, legislature experts, etc are disincentivized to enter into politics due to the high costs involved both financially and otherwise. 

Psychological, sexual, and physical violence against women swamps the arena of politics. Sexually provocative comments publicly directed on new media, abuse from traditional media, the pressure to conform to a subordinate, the stereotypical image of an ideal woman, threats, and physical violence scourges the day to day experiences of a woman contesting to enter into government.

Reform Recommendations

Despite Sri Lanka ratifying the Convention on Elimination of All Forms of Discrimination Against Women (CEDAW) and enshrined its commitment in the Women’s Charter of Sri Lanka (1993) and the National Plan of Action for Women (1996) reflecting constitutional and international commitments to securing the rights of the woman, the country is yet to implement progressive reforms that will increase women’s participation in the democratic process. 

While there are a multitude of reform recommendations that can assist in improving Sri Lanka’s female representation in government, a transparent and fair framework to finance election campaigns through the Election Finance Campaign Act takes precedence and can pave the way to level the playing field in electoral competition between genders. Introducing a cap for spending on election campaigning and amending election laws to include disclosure of information pertaining to the quantum and sources of campaign contributions can combat illicit campaign financing and high costs involved. Moreover, voluntary, non legislated practices such as internal fundraising mechanisms in-kind contributions can help address the gender funding gap within parties. Moreover, countries like Brazil have put in place provisions to ensure a certain airtime for female contestants from each political party.

Initiating training programmes and capacity building for women aspiring to run for office is crucial in increasing and solidifying effective female representation. These programmes can be targeted at grassroot level activists and even extend to local school levels to encourage and motivate young women to pursue a career in politics. Moreover, special attention should be given to proper selection criteria and conducting the said programmes trilingually. Within parties, training programmes and capacity building should be provided to women along with due recognition and equal opportunity. 

Moreover, introducing a mandatory quota for women in the national list for major parties is yet another step that can be taken in addressing gender underrepresentation. This can facilitate female expectants to avoid financial burdens and gender-based violence and aggression associated with campaigning.

Sathya Karunarathne is a Research Executive at the Advocata Institute and can be contacted at sathya@advocata.org or @SathyaKarunara1 on twitter. Learn more about Advocata’s work at www.advocata.org. The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute

The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.

The first test of the President’s ‘power’

In this weekly column on The Sunday Morning Business titled “The Coordination Problem”, the scholars and fellows associated with Advocata attempt to explore issues around economics, public policy, the institutions that govern them and their impact on our lives and society.

Originally appeared on The Morning

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By Dhananath Fernando

Power cuts in Sri Lanka are not a recent phenomenon. However, this phenomenon is going to be repeated over and over if we fail to find a sustainable solution. The media reported that during the 2019 blackouts, senior officials in the Ceylon Electricity Board (CEB) had to beg the rain gods with a special “poojawa” to fill our reservoirs faster as they ran out of any other option. As reported by media, pressure mounted to a level that the then President was very disappointed with their performance and requested that the Public Utilities Commission of Sri Lanka (PUCSL) and CEB agree on a common plan.

It is clear that the energy problem in Sri Lanka is extremely complicated. This problem has no simple solution, as structural constraints, economic limitations, technological drawbacks, and many other complications continue to ravage Sri Lanka’s energy sector. The current President has received a mandate for a “system change”. How he solves this problem will be a litmus test on his administration. His approach and ability to solve this complicated public policy problem will determine whether such an ambitious “system change” is possible.

Understanding the context

The uniqueness of electricity is that we cannot store it on a grand scale – until the world comes up with a cost-effective battery storage solution. This places the CEB in a challenging position, as it has to walk a fine line between undersupplying and oversupplying power to the country, without an option to store electricity and manage shortfalls. In other words, all electricity that is produced has to be met by demand, and the CEB has to have a constant supply available, as it would be impossible to predict electricity demand down to the last unit. If the electricity demand is higher than what is generated, the grid becomes unstable. Producing more electricity than is demanded will make it difficult to manage the grid. It would also be very expensive as our electricity supply comes from multiple sources such as hydro, coal, thermal, and few renewable energy sources.

When demand increases, we can’t just activate a power station and supply electricity to the grid, as activating some power plants, setting up the temperature, and resetting the grid takes a few days. That is one reason as to why the CEB requires a few days to overcome this situation with the Norochcholai Plant becoming dysfunctional. Even with low power demand due to the contraction of economic activity such as tourism and some industrial plants, resetting the grid without Norochcholai and managing the capacity with other plants takes a few days. To put it simply, the CEB does not have an easy task at hand. The most economical form of generating electricity is hydropower where the cost per unit is about Rs. 6. We cannot match demand only through hydropower, however, and we have to activate our coal power plants during peak hours when demand rises. The unit cost of coal-generated electricity is approximately Rs. 17.50 per unit and Rs. 25-35 is the unit cost of thermal-generated electricity. According to energy specialist Dr. Tilak Siyambalapitiya, the overall cost of production of a unit of electricity is Rs. 23.32 and the approved selling price is Rs. 16.29. In other words, our selling price only covers about 70% of the generation cost. The important fact is that the cost for each unit we consume is not the same; the cost of the energy we consume during peak hours from 6 p.m.- 1 p.m. is more, as it is mainly generated from thermal and coal.

Sri Lanka’s cost per electricity unit is comparatively high compared to our neighbours like Kerala, Tamil Nadu, India, and Bangladesh. But one real reason for the cost to be lower in these countries is they have blackouts during peak hours without activating their thermal and coal plants, and households have adapted to face blackouts with some capital investments such as battery power and installing inverters. In Sri Lanka, the economic cost of a blackout would be significantly higher than supplying power through coal, thermal, and renewable energy sources. Hence, our cost is high for a multitude of reasons.

The composition of Sri Lanka’s grid is based on domestic consumption, making our peak demand hours in the evenings between 6 p.m.-10 p.m. In contrast, countries with greater industrial development have peak demand hours during daytime working hours. Additionally, in Sri Lanka, there is a tug of war between the regulator, the PUCSL, and electricity supplier, the CEB, on developing a long-term power generation plan and maintaining our power mix. As a result of this cold war, not a single power plant has been commissioned to be built during the last Government. It is rather unfortunate that Sri Lanka’s inability to come to a timely consensus on solutions for this chronic issue has continued to weigh down our national potential.

The CEB monopoly

The CEB has an absolute monopoly in power generation, distribution, development, and technology implementation. It’s a monopoly within a non-tradable sector. They have blocked everyone else and kept complete control.

Even though power generation and power stations have been contracted to suppliers of renewable energy in the private sector, they too fall under the CEB’s control. It was reported multiple times by the media that the CEB buys power from private energy suppliers at a high cost, causing colossal losses for the CEB.

It’s a mafia ecosystem between bureaucrats and the private sector. The more thermal power we buy, the more beneficial it is for the cartel members to make more money. The grid and cable network is also maintained (generation, transmission, and distribution) by the CEB with no competition, making it completely inefficient.

When questioning the CEB on its colossal losses, one common excuse provided by all governments is that the CEB sells units of power at a cheap rate so that all Sri Lankans have access to electricity. However, it is important to note that if the CEB makes a loss, it would be indirectly passed to the taxpayer anyway, as no CEB official or parliamentarian pays the losses from their private money. Our cost of power has a greater impact on Sri Lanka’s investments, and its ability to get faster connectivity to the grid is one main parameter in the “Ease of Doing Business Index” compiled by the World Bank (WB).

The CEB’s losses have also extended into the Ceylon Petroleum Corporation (CPC). In the past, the CPC stated that they would stop the supply of fuel if the CEB fails to settle its debts. This continues to be an ongoing battle. Both the CEB’s and CPC’s losses are passed onto taxpayers, even though their claim that our electricity is reasonably prices is a flawed argument and proves to be counterproductive, given that our energy prices are not reasonable when compared to the region. 

Over the years, it was reported that a grant from the Asian Development Bank provided $ 17 million in 2012 to modernise the System Control Centre (SCC), which is the main control centre for managing demand and supply of electricity.

Even though an SCC is the heart of managing electricity demand and supply and stabilising the grid, it took Sri Lanka more than a decade to execute this decision. The CEB, a state corporation with an asset base of Rs. 500 billion, being unable to finance crucial infrastructure development such as the SCC is indicative of a culture of inefficiency and ineffectiveness that is inherently ingrained within monopolies.

One of the main promises of H.E. the President is creating an e-government system and digitising government systems and processes. If the Government is serious about this, installing smart meters as soon as possible under the digitisation programme must be a key consideration. With the installation of smart meters, a significant cost for the CEB would be reduced. In an age where our bank card is connected to a mobile-based platform, where private buses are in discussion about a smart card, can we as a country still afford to have a system where an officer has to visit every household in Sri Lanka to check the electricity meter and provide a bill? Especially in an energy market where the cost of the unit changes based on the period of the year and as per the time of electricity usage? Introducing smart meters will not be a popular solution, but a system change cannot be achieved without making unpopular decisions!

Possible solutions

The problems at hand have many tiers. The main barriers for reforms are structural. While operational and human resource-related reforms can be undertaken, without structural reforms, the operational issues and human resource issues sustainably fixed will continue to be chronic weaknesses.

Structural changes

With the Imposing, a strict leadership style or rolling heads at the senior level of bureaucracy in the energy sector will not be productive given the structural problems that exist. In fact, it will most likely worsen the situation if dealt with in this manner.

As a first step, the monopoly held by the CEB must be un-entangled and straightened out. The ecosystem of corruption, inefficiency, and malpractices has to be exposed to competition, with players entering the market.

There are multiple options to do this, and we have to unbundle the monopoly of power generation, transmission, and distribution as the first step. This will be a major structural change. To ensure competition, in the long run, a competition law has to be established which will not only be beneficial to the power and energy sector but for all Sri Lankan monopolies.

Opening energy for trading

Since Sri Lanka is an island, we are not in a position to trade energy, as our grid is not connected to any other energy market. Even if we generate a surplus of energy, we cannot trade, and in an emergency, we do not have the capacity to manage a sudden shortage.

One suggestion by Prof. Rohan Samarajiva in a report compiled under the chairmanship former Central Bank Governor Dr. Indrajit Coomaraswamy and handed over to H.E. the President is to connect Sri Lanka’s grid to the South Indian grid through an HVDC (High Voltage DC) cable.

Energy trading is already in place between Bhutan and India, and Bhutan is a net energy exporter and their energy cost is very low as their generation is mainly from hydropower due to their unique mountains and geography. This has to be taken up at the highest level with negotiations bilaterally if we are aspiring to be part of a big energy market and if we are serious about being a hub for energy in the Indian Ocean.

In an era of uncertainty and supply chain diversification, it is not a bad idea to move ahead from a simple self-sufficiency mentality to a mentality of generating a surplus and aiming to become competitive within the energy industry.

While we work on these long-term solutions, we have to make sure to build the necessary power plants in the short run to manage our energy supply, while diversifying towards renewable energy sources.

The energy mafia is so large and sometimes they work by planting big ideas that are backed by self-interest of the key decision-makers, including H.E. the President.

If we continue to think in isolation and settle for mediocre options yet again, we will just be postponing the problem before us. Our President has the rare opportunity to fulfil his mandate of a “system change” and tangibly change the system by reforming the energy sector. Alternatively, he could take the easy road by postponing any serious tackling of the problem. I hope the Government will have the courage to change the system, instead of giving into pressure.

By implementing this reform, the Government will be working towards bringing the average Sri Lankan out of the figurative darkness of the nation’s long-running electricity crisis.

The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.

Sri Lanka’s economy must follow Vietnam

In this weekly column on The Sunday Morning Business titled “The Coordination Problem”, the scholars and fellows associated with Advocata attempt to explore issues around economics, public policy, the institutions that govern them and their impact on our lives and society.

Originally appeared on The Morning

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By Dhananath Fernando

With the appointment of the Cabinet of Ministers and state ministers, the real game has started. Now the challenge is transforming an ailing economy to a competitive economy within a short period of time. There are many debates among the public on the division of ministerial portfolios. However in reality, bigger economic challenges and a need to manage foreign affairs will outweigh all micro debates put together.

Problems at hand

The problems in our economy have been discussed extensively. We all know that we are burdened with short and long-term severe economic ailments. We have to literally unlearn, undo, and pay for the sin of economic mismanagement of over 40 years within the next four years. As a matter of fact, $ 4 billion is required each year for debt servicing in the coming four years. Just to put things in context, per year we need four times the value of the Hambantota Port deal to just keep our noses above water. We have to do it for four years provided that there are no major negative shocks in the global and local economy. The poor public finances management combined with deteriorating government income are just additional issues we have to deal with. Sri Lanka managed to contain Covid-19 well compared to our neighbours, but with New Zealand going back to a lockdown and many Sri Lankans working abroad planning to return within the next few months, there is an indication that the risk of a sudden uptick in COVID cases is still high.

Reading the mandate

In this context, people have provided a two-thirds majority for “Saubhagya Dakma”, the manifesto of His Excellency the President. Though it is a reasonable assumption to read this election victory as the citizenry’s overwhelming support of the manifesto, I believe it is also a voice of tiredness and displeasure by all Sri Lankans against the economic and political system that we marinated in for decades. This message can be put simply as a voice calling for a complete revamp of the existing system. In other words, making a competitive, efficient, productive, and sustainable system for a progressive Sri Lanka. The underlying voice is that Sri Lankans are not happy with where we are, although the same Sri Lankans are responsible for electing all governments in the past. It may also be read as a serious betrayal of people’s expectations and under-delivery in performance. A clear mandate was provided in November last year before COVID-19 and it has been re-assured post-COVID with another mandate. Since the world has come to a new equilibrium post-COVID on the economic front, it is important to keep an up-to-date pragmatic approach with the underlying principle of making our economy competitive, efficient, relevant to global markets, and productive.

Role model Vietnam

Through a pragmatic and dynamic approach, one country that has done exceptionally well, not only in the containment of Covid-19 but also in economic management, is Vietnam. Sri Lanka has many lessons to learn from Vietnam if we are serious about transforming our economy! Till 30 July no deaths were reported in Vietnam due to Covid-19 infections, despite Vietnam sharing a border with China and having a population of 95 million. However, over the last few days, according to data, there is a sudden uptick in cases and 16 deaths have been reported. This is also a reminder that Covid-19 management is a continuous battle that must be forged until the world comes up with a vaccine or sustainable solution. By 1986 Vietnam had suffered two wars and their economy and social condition was in shambles. Vietnam won the war with the US but the victory meant very little to overcome economic hardships. Making things worse, they had to fight another battle with Cambodia while it was believed that Cambodia was supported by China. After two crippling wars, Vietnam had lost about 1-3 million young people. Basically, at this point, Vietnam was worse off than Sri Lanka right after the war.

The post-war “Doi Moi” programme transformed Vietnam and put them back on the map in just 10 years. Vietnam managed to pick the right policy mix through the Doi Moi programme and managed to establish a strong economic foundation, stronger than our post-war reforms. This doesn’t mean that Vietnam has solved all their problems, but they have been able to create a strong economy which can withstand a global pandemic. About 97% of their population have health coverage and so far it looks like Vietnam is one of the biggest survivors of the Covid-19 pandemic. They were only able to do this as a result of the business and trade-friendly economic programme they introduced in the early 1990s.

Vietnam started labour-intensive productions similarly to Bangladesh and Sri Lanka, but unlike Sri Lanka, they managed to move on to more technologically advanced product categories. Although Vietnam is somewhat behind us in raw numbers, they are far ahead in the journey of being the next economic miracle in Asia.

How they did it

Simply, they carried out reforms to improve the competitiveness of the Vietnamese economy. Tariffs at the border were lowered to improve the competitiveness of Vietnamese products. The Government limited its role to that of a facilitator and the private sector and foreign direct investment were given the opportunity to lead the economy. Global co-operation was embraced and Vietnam signed 10 very well negotiated free trade agreements. Though I am not a strong proponent of free trade agreements and I believe in unilateral trade facilitation, Vietnam has signalled how serious they are on trade through their consistent collaboration with other markets.

With the Doi Moi programme, they first managed to get one main investor, Nokia, and then built confidence in capital markets. As a result, other investors rallied around the main investment and diversified rapidly. Today, Vietnam has become the China of China. Vietnam has good trade relations with both China and the US and have become the largest beneficiary of trade tensions between these two global economic giants. Due to trade tensions between the US and China, most Chinese-manufactured products were transhipped through Vietnam. On the other hand, most US-allied countries looked at a business-conducive market outside China to diversify their factories and Vietnam had the right ingredients for investments. While most other regional markets, including Sri Lanka, were trapped in labour-intensive industries, Vietnam had already moved to high-tech and advanced product categories through global co-operation.

Samsung shifted its smartphone production to Vietnam, Apple is reported to manufacture its Airpods in Vietnam, and Google plans to shift its smartphone production from China to Vietnam. As a result of co-operation with these global companies, homegrown Vietnamese companies are now emerging, showing competitive potential in global markets. A good lesson for Sri Lanka on understanding the recipe to improve local production is that local production can be improved only if we produce goods and services on a globally competitive scale. Vietnam has proven this.

China Plus One strategy

With Covid-19, ideologies on self-sufficiency are resurfacing, but the reality is that the world has decided to diversify its supply chain. China is the factory of the entire world, but due to rising labour charges even before Covid-19, companies were considering moving out of China. However, given the large infrastructure and business ecosystem and the availability of a range of skills (low-level skills to high-level, specialised skills) in one market, China is still competitive. But now companies are moving to a “China Plus One” strategy – meaning they keep their supply chain in China while investing in another Plus One market as a contingency. Again, Vietnam became the ideal location given the close proximity to China and more than that, its business-conducive environment. Sri Lanka too can get few investments if we play our cards right with big-ticket investors using a China Plus One strategy.

Lessons and solutions

Sri Lanka needs to unlearn from the era of producing everything on our own. That is history. Now the world is in a place where they produce only parts and components and have moved on to assembly. Sri Lanka needs to get onto this boat and begin producing parts and components and that too, competitively. Just producing products for the sake of producing them is not the way to boost local production. Like Vietnam did, first, you get the know-how and play with world-class players on your own soil which will produce results. This will not only improve our share in global markets but also improve local production. I hope the new Government and the respective ministers will understand the dynamics and capitalise on this wave. I wish them all the strength and vision to build a resilient economy and wish Sri Lanka’s economy will stand the test of time.

The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.

Economic relations with India: What would a true patriot do about the Port?

Originally appeared on The Daily FT

By Prof. Rohan Samarajiva

The East Container Terminal (ECT) in the South Harbour of the Port of Colombo has become a flashpoint of nationalist agitation. Agreement had been solemnly concluded to develop the ECT in collaboration with the governments of India and Japan. Some, fronted by trade unions, are agitating to scrap the agreement and make the terminal one that is fully owned and operated by the Sri Lanka Ports Authority (SLPA). Hoary arguments about selling national assets are being trotted out again.

What would a true patriot do?

True patriotism asks what advances the life chances of the people living on this island; it asks what reduces the harms that may befall them. A realistic assessment of the problem at hand must be the first step. The Port of Colombo comprises operations by three entities: the CICT which handles 40% of the business through one terminal is majority-owned by China’s CM Ports (SLPA has 15% ownership); the SAGT is 85% owned by a consortium including JKH, Maersk/APM Terminals and Evergreen Marine Co. (SLPA owns the rest); and JCT which is fully owned by the SLPA.

The ECT is the second terminal to be made operational in the South Harbour which remains the only deep-water port in the region capable of accommodating the largest ships. The Port of Colombo was the 25th largest in the world in 2018, in terms of container throughput, and showed rapid growth before the recent disruptions. An economy the size of Sri Lanka’s cannot support the world’s 25th largest port if all it handles is cargo originating from and terminating in the country. More than 70% of Colombo’s cargo is coming from or going to India. India’s two largest ports are JNPT in Maharashtra and Mundra in Gujarat. Colombo handles more Indian boxes than Mundra, arguably making it India’s second-largest port. If for some reason the Indian containers were not transshipped through Colombo, the losses to the Sri Lankan economy will be grave. The earnings from what is essentially an export of port services will cease. Colombo will no longer justify frequent liner service. Sri Lankan shippers will have to send their containers in small ships to a regional hub to be transshipped to the large vessels that no longer call at Colombo. Hub ports enjoy economies of networks.

The more ships call at a port that provides transshipment and related services, the more attractive that port becomes to other ships. It provides a degree of stickiness to a hub, but hub status is not permanent. If the quality of the services provided declines or prices are higher than those in competing ports, a big shipping alliance (three alliances are responsible for 80% of the container traffic) may pull back leading to the unravelling of hub status. One of the reasons Colombo is a preferred port for shipping alliances is its turnaround time: how quickly can a ship leave the port after unloading/loading. It is behind Singapore and other leading ports, but quite a bit ahead of Indian and Bangladeshi ports. However, the strikes that were launched before the elections on political matters unrelated to working conditions may be putting Colombo’s reputation at risk.

Alternatively, a government decision based on geo-political considerations may trigger the process. Especially before elections, Indian politicians come up with plans to build ports in the south of India that will create new employment and business opportunities and ‘save’ the $ 100 per container they claim goes to Colombo for transshipment. But the more real danger is the significant Chinese stake in Colombo Port which may be seen as a strategic vulnerability in the context of the simmering tensions between India and China. The Port of Colombo, which is dependent on transshipment business from a single country, is especially vulnerable in this regard.

Geopolitics

Even if one focuses solely on the Port of Colombo, the geo-political factors loom large. The largest terminal is owned and operated by a Chinese company. The refuelling of Chinese submarines in the port in 2014 was source of serious friction. The tensions between India and China are at a historical high currently. In this context, a decision to give an Indian company a stake in the ECT, and thereby in the success of the Port of Colombo, would give comfort to the securitywallas in New Delhi. It makes eminent sense in terms of safeguarding Colombo’s hub status and revenue stream. Whatever decision is taken about ECT will be interpreted in a larger context. Prime Minister Mahinda Rajapaksa has asked India to withdraw its interest in the under-utilised and money-losing eponymous Airport located in Mattala. The government is also reported to have asked India to give back the rights to the unused but controversial oil tanks in Trincomalee. The Indian government is likely to connect the dots in ways that reinforce the perception that the Rajapaksas are tilting toward China.

But what about not selling national assets?

The land and the location are not sold. The port continues to be owned by the SLPA. It is simply one section of the south harbour that is to be concessioned out for a defined period for a specified purpose to a consortium that will also include the SLPA. The land by itself does not produce value. Value is produced when the right kinds of investments (including the right kinds of gantry cranes, not what were ordered for a different location) are made and the right kinds of services at appropriate levels of quality are supplied. Because of the relative power of shipping interests, it is now common practice to allow shippers to have stakes in terminals. This is the case even in the highly efficient state-owned Port of Singapore.

For over two decades, parts of the Port of Colombo have been privately operated based on long-term contracts. Some of the members of the consortium that invested in SAGT in 1999 are foreign. CICT, the terminal showed the best performance, is at $ 600 million, one of the largest Chinese investments. It has been operational since 2013. The relationships leveraged by those companies and the efficiencies they have introduced have contributed to the Port of Colombo flourishing even when the Indian economy slowed down.

This experience alone should give comfort to those concerned about foreign investment in Sri Lanka’s infrastructure. The land is here, the millions of dollars in investment is fixed to that land and cannot be taken away, and the market relationships and skills the investors have brought have caused the entire port to improve. Sri Lanka earns from the export of port services, those who work for the partially foreign-owned companies make a good living, they all pay taxes, and the national economy benefits by having the 25th largest port in the world with direct sailings to key markets. A true patriot will understand that foreign investments in commercial enterprises are superior to foreign loans. In the former, the risks are shared. If the investment does not make profits, the foreign investor too is out of pocket. Thus, the investor has the incentive to make the business succeed. This is not the case when loans are taken to build and operate infrastructure on our own to satisfy some atavistic yearning. With loans, the risks are all on our side. Whether the business succeeds or not, the loan must be repaid. If something goes wrong, as has been repeatedly the case with the Norochcholai electricity generators built with Chinese loans, The China Ex-Im Bank does not suffer. Only we do.

So, a true patriot will not only understand the nature of modern port operations and the difference between loans and investment. She will also understand the geopolitical context and support the taking of precautionary measures to build the confidence of major actors such as India who can easily stymie efforts to advance the well-being of our citizens and reduce the harms that may befall them. A true patriot will support the government in its efforts to honour legal commitments and strengthen Sri Lanka’s most important relationship, that with our giant and proximate neighbour.

Rohan Samarajiva is founding Chair of LIRNEasia, an ICT policy and regulation think tank active across emerging Asia and the Pacific. He was CEO from 2004 to 2012. He is also an advisor to the Advocata Institute.

Sri Lanka's Rajapaksa restoration is complete. What comes next?

Originally appeared on Nikkei Asia

By Prof. Razeen Sally

Government may have to rely on new Chinese loans to avert a macroeconomic crisis

Sri Lanka's parliamentary election on August 5 delivered a thumping victory for President Gotabaya Rajapaksa and his older brother Prime Minister Mahinda Rajapaksa's Sri Lanka Podujana Peramuna, or SLPP, party. Following Gotabaya Rajapaksa's decisive victory in the presidential election last November, what does the Rajapaksa family's unlimited rule portend for Sri Lanka and its external relations?

Illiberal democracy, a state-led economy, Sinhala-Buddhist supremacy -- Sinhala Buddhists are about 70% of the population, and a China-centric foreign policy were the hallmarks of Mahinda Rajapaksa's rule when he served as president until 2015. His surprise election defeat opened a window for liberal democracy, a more internationally open, private sector-led economy, reconciliation with ethno-religious minorities, and a more balanced foreign policy to reengage with the West and India.

But the coalition government that followed was a total disaster, crippled by no reform strategy, venomous internal warfare, corruption scandals and rank incompetence. The Rajapaksa restoration last November revived the core features of the previous Rajapaksa rule. But now Gotabaya Rajapaksa is in the driving seat, and Sri Lanka faces a COVID-19 plagued world.

With a handful of allies, the SLPP will have a two-thirds parliamentary majority, which will allow it to change the constitution at will. First will come the repeal of the Nineteenth Amendment, which limits presidential powers and strengthens parliament and the judiciary.

Optimists argue that Sri Lanka now has the political stability and decisive governance it lacked under the previous government. President Rajapaksa has centralized power in his small circle, crowded with retired senior military officers. Even more than his brother Mahinda, he favours Big Man rule, exercising untrammelled power, issuing orders and expecting them to be executed without dissent or delay. That has worked, so far, to limit the spread of COVID-19 in Sri Lanka. But will it work to tackle more complex and long-standing problems concerning the economy, interethnic relations, public administration and much else besides?

Countries become stable and prosperous by nurturing effective institutions and social trust over time, not with Big Man politics with its never-ending command-and-control, short-term, ad hoc fixes. That is something the Rajapaksas -- and all but a tiny minority of Sri Lankans -- don't seem to understand. Sri Lanka is now hurtling back to illiberal democracy. It may provide short-term political stability, but I doubt it will lead to better governance.

This Rajapaksa government, like the last one, espouses a collectivist economic ideology. Its first budget was full of tax cuts and expenditure entitlements, guaranteed to increase the fiscal deficit and public debt. The policy consists of diktats and constantly changing regulations on taxes, monetary expansion and import controls.

Sri Lanka was already in a debt trap when this government came to power. Total public debt is about 90% of gross domestic product, and total external debt, at over $50 billion, is about 60% of GDP. Then COVID-19 struck. The budget deficit may go up to 10% of GDP this year, and the economy may shrink by up to 5%. There is no fiscal space for tax cuts and extra public expenditure. The government desperately needs to negotiate debt moratoria, extra loans and possible debt restructuring with the International Monetary Fund and others. But, for now, it has no plan.

The Rajapaksas are unapologetic Sinhala-Buddhist nationalists. President Rajapaksa and the SLPP were elected with a huge majority of Sinhala votes but only a tiny percentage of ethnic-minority votes.

The Sinhala-Tamil cleavage is long-standing. The Easter Sunday blasts last year, perpetrated by Islamic radicals, opened a new cleavage between Sinhala Buddhists and Christians, on the one hand, and Muslims, on the other. The Rajapaksa Sinhala-Buddhist supremacist agenda is guaranteed to keep ethnic tensions on the boil. Muslims will be most at risk if that gets out of control.

President Rajapaksa has largely ignored the West, the IMF and other international organizations, but he is friendly with Narendra Modi, a fellow strongman and ethno-religious nationalist. China, however, remains "first friend." Money talks: Chinese state-backed investment is the only big game in town. There is a real possibility that Sri Lanka will rely on new Chinese loans to avert a macroeconomic crisis, especially if it does not come to a new agreement with the IMF.

Sri Lanka increasingly resembles a Chinese tributary state -- rather like a brief interlude in the fifteenth century, when Admiral Zheng He abducted a local king and took him to Beijing to pay obeisance to the emperor, after which an annual tribute was sent to China.

Sri Lanka is a bewitchingly beautiful country. Since ancient times, it has won the hearts of many a visitor. I would know since I grew up there -- I am half Sri Lankan, half British -- and have spent the past decade travelling all over the island to write a travel memoir.

But Sri Lanka is a little country with layer upon layer of complexity and paradox, and a dark side that has benighted its post-independence politics and institutions. As an adviser to the last government, I saw up close its shambolic disintegration. Understandably, Sri Lankans voted for the only realistic alternative: the Rajapaksas. The prospect of another decade of Rajapaksa hegemony does not fill me with optimism.

Prof. Razeen Sally is a visiting associate professor at the Lee Kuan Yew School of Public Policy at the National University of Singapore. He is also the author of "Return to Sri Lanka: Travels in a Paradoxical Island."

New government must ‘unlearn’

In this weekly column on The Sunday Morning Business titled “The Coordination Problem”, the scholars and fellows associated with Advocata attempt to explore issues around economics, public policy, the institutions that govern them and their impact on our lives and society.

Originally appeared on The Morning

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By Dhananath Fernando

The election is over and a strong and secure mandate has been provided to President Gotabaya Rajapaksa and the Government. The President has already announced that the new Parliament will be convened on 20 August and I congratulate all the members who will represent our citizenry in this Parliament. It is certainly going to define a new era for Sri Lanka if the newly elected members take it seriously.

Regardless of which party won or the composition of the government, Sri Lanka’s challenges were always going to remain unchanged. A new government cannot create a new Sri Lanka unless the government takes a new approach and starts to unlearn and undo the wrongs we’ve been committing for decades. 

Challenge 1: A severe economic recession 

The official data released by the Census and Statistics Department just the day before the election indicated a 1.6% negative economic growth (economic contraction) in real terms in the first quarter (January-March). Considering the depreciation of the Sri Lankan rupee, in US dollar (USD) terms, it is approximately a 5% contraction of the economy in the first quarter. Sri Lanka took strict social distancing measures towards the end of March, so we have to expect further economic contraction in the second and third quarters. The new government’s biggest challenge would be realigning the economy. 

According to the Export Development Board (EDB), exports have been picking up almost on par with last year’s exports, which is a big relief. A potential reason behind the recovery in exports could be the fact that India and a few competing countries have failed to manage Covid-19. As a result, some degree of production has been parked in Sri Lanka even though our cost factors are high. In the long run, we should be able to keep those orders on our shores by offering competitive prices. Otherwise, once those markets (India, Philippines, etc.) open and bounce back to normal, we will have to fall back to square one.

The EDB has expressed concern about the apparel sector’s ability in securing orders after August. Therefore, the new government has to get prepared early by starting negotiations with the International Monetary Fund (IMF) as soon as the new Parliament is summoned. Our neighbouring countries such as Nepal, the Maldives, Bangladesh, and Pakistan have already managed to secure IMF bailout programmes to overcome the brewing global economic crisis. 

Challenge 2: Trust, cohesiveness, and diversity

Over the last few decades, Sri Lanka has had emotional wounds which haven’t recovered yet. Over the years “suspicion of others’ religious and ethnic identity” has taken root amongst our fellow Sri Lankans and petty politics have ignited these fears in order to polarise Sri Lanka.

All political parties created suspicion between each other for their political advantage. Now, the very same suspicion has become the main bottleneck for us to move forward towards economic development.

In my view, this paranoia of suspecting each other is one reason why Sri Lanka is lagging in economic development when compared to other competitive East Asian countries. For more than 30 years, our Sinhalese and Tamils were suspicious of each other and did not respect our diversity. This led to the creation of the LTTE, who also capitalised on these fears while all of us became victims and losers.

If you remember, thereafter tensions were created between religious groups for converting people to a different religion for financial incentives. The wounds are not yet fully healed between the North and South, and new tensions have erupted between Muslims, Catholics, and Buddhists.

Our suspicions go beyond that. Businessmen have been labelled as a group of people with an “only for profit” motive (“businesskaaraya”), regardless of the service and assistance they provide to our economy. Private enterprises have always been attacked for playing a villain’s role over the years. As a result, all our young graduates keep expecting government jobs.

Now, we are in a situation where our revenue is not adequate to pay the salaries, pensions, and social security expenses of the government. Going a step further, we have created suspicion on foreigners and foreign investors with the famous term “foreign conspiracy”, while completely disregarding diversity. Every white-skinned person has been labelled a threat for an invasion rather than an opportunity to explore opportunities for co-operation globally.

We are where we are now as a collective result of all these domestic perspectives. We all unanimously agree that we have played far below our potential and that we are a deeply divided nation.

We are further divided on political ideology, so much so that we kill each other and damage each other’s property. The new government has the challenge of undoing and unlearning these practices. “Suspicion” is the seed that can crack any relationship, friendship, partnership, or co-operation. Even in Buddhism, “suspicion” is considered an emotion to be treated with extra caution.

Sri Lanka’s strength is its diversity. Starting from our biodiversity, diversity in weather and cultural and architectural diversity have always been our edge. Our exports need to be diversified, our economy has to be diversified, and our Sri Lankan mindset and experiences need to be diversified.

How can we create diversity without respecting diversity between people and all Sri Lankans? One of the main challenges for the new government will be establishing diversity and bringing everyone together in heart and in practice rather than spending years on documenting regulations and strategies. All political parties need to co-operate with the new government, as Sri Lanka is wounded beyond her threshold of tolerance. 

Challenge 3: Establishing competitiveness

Making Sri Lanka an economically advanced nation can only be part of a broader strategy, which is dependent on making our economy competitive. To establish competitiveness we need to increase our productivity and efficiency. The game is like winning the World Cup, where the only way to do it is to play well and play better than all the other teams. The same applies to our economy. There are multiple ways to improve productivity and efficiency. We need to think on a global scale and produce in relation to global markets while joining the Fourth Industrial Revolution. That is the next challenge for the newly elected government. 

The recent reality TV programme performed by teenagers which is getting popular across the world is one good example of the miracles as a result of competition and a competitive environment.

Young Sri Lankan teenagers proved that Sri Lanka can compete. Some of the young artists have not only challenged local original musicians but also western original musicians in their vocals and musical capacity. Some have been compared in foreign media for their performance and this is an indication that the younger generation is ready to compete and they have the fire to compete on the global stage.

Another event that made headlines was Sri Lanka’s national debating team becoming the runner-up in the World Schools Debating Championship by debating in a language which is not their mother tongue – another good example of the benefits of competition and why Sri Lanka can compete on a global level if we pick our strengths right and create a competitive environment.

The new government should push Sri Lankans to work hard for free exchange and create an environment of opportunities for any individual to be successful regardless of religion, ethnicity, caste, or creed. Sri Lanka has been practising to avoid competition and be isolated from the world – the complete opposite.

The new government has the challenge of undoing and unlearning most of what we have been doing over the years. I wish all the courage to His Excellency the President, the new government, and the new Minister of Finance and all the strength to bring in the hard reforms and to put Sri Lanka back on the map.

The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.

Why Sri Lanka cannot be developed?

In this weekly column on The Sunday Morning Business titled “The Coordination Problem”, the scholars and fellows associated with Advocata attempt to explore issues around economics, public policy, the institutions that govern them and their impact on our lives and society.

Originally appeared on The Morning

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By Dhananath Fernando

Since Independence or even before that, as Sri Lankans, we have had one main question. How can Sri Lanka be developed? This same topic has been resurrected again, as usual just before another general election. Fighting terrorism, raising national security, adopting a new constitution, and many more popular topics, boil down to the same question over and over again – how can we develop Sri Lanka and why have we failed to do so for many years? 

We have analysed, reanalysed, and one can even claim overanalysed our economy. The same problems and the same solutions have been discussed for decades. The stories of how Singapore was behind us and how the then leaders in Singapore envisaged Sri Lanka as their role model for development is a story we have heard repeatedly.

How South Korea was just an underdeveloped nation compared to Sri Lanka in the 1960s and how Sri Lanka was just behind Japan at Independence are stories any Sri Lankan can repeat with their eyes closed. After having learnt lessons told by these stories, why couldn’t Sri Lanka accelerate growth to become a developed nation? This definitely is something hard to comprehend. 

After thinking this over and over again, I felt that “Sri Lankans do not want to make Sri Lanka a developed country”, is a reasonable conclusion as to why we failed. Simply, we do not have the fire in our belly to overcome the hard economic conditions we pass through. Over the years, we have become a nation which has become more dependent on the Government. Rather than us as individuals taking ownership of what we do and how we could overcome challenges in life, we have moved to the backseat, expecting governments to present solutions on a platter.

It is true that we have extraordinary talents and skills but collectively, we have been mediocre and settled in an “average” mindset. Making the “average mindset” an advantage over the years, our political elites across all political parties have been promising more government-centred solutions instead of empowering individuals to take and drive the economy at the ground level. 

Making our people purely dependent on the Government has become the main economic policy followed by all mainstream political parties. Such a dystopian economic policy advocated by the political parties is based on number play and talk show screens where they point fingers at each other. The unique selling point of a political party’s economic policies have been the size of the relief package, number of government jobs, and glittery promises, which are beyond delivery under any realistic circumstances.

While political parties and politicians have taken our citizenry for a ride, the citizens themselves have evolved to live in an average world, with an “average mindset”. The composition of Sri Lanka’s Parliament, and the calibre and quality of our representatives in Parliament, is an equal representation of the vast majority of Sri Lankans. Both seem to lack a burning need/desire to get our economy on the right track.

Even someone with a political party affiliation would agree that the choice of candidates before us to exercise our franchise is extremely poor. However, considering the support base across for all political parties, we have to agree the choices that are provided are a fair representation of our people. 

Regardless of which government is in power, our economic policy has been more or less the same. Though there are micro changes in certain policies, in a wider spectrum, our way of economic management has been the same for over nearly two decades. Different governments came into power and pretty much the same faces ruled the country (crossovers between political parties) without having the courage to drive a serious economic reform plan. At certain junctions of our political economic history, economic reform plans were discussed by the people and policymakers. However, certain cross sections of society with vested interests chose their personal benefits and perks over the good of the nation and they did not allow any progressive plans to take off. 

We burnt days into years and years into decades just enjoying the events, stories, and dreams created by the people’s representatives themselves. They crossed over from one party to another, made controversial statements, the rest agreed and disagreed; we brought in new faces to politics, criticised each other, and to this day, the same circus continues.

As a consequence of being ardent fans of this drama, Sri Lanka has become older instead of becoming rich. Sri Lankans have trapped themselves in this drama at the cost of a hardworking route based on the free exchange of ideas and limited ourselves to a more inward-looking approach, giving up the journey to improve a country that aspires to have a higher standard of living.

We proudly scream the words: “Sri Lanka has been a developing country and will be a developing country for the rest of our lifetime.”

Instead of passing the blame onto politicians, we the people have always been less aspirational about overcoming the deteriorating economic conditions, and that is the very reason we have failed over and over again. 

Though our literacy rates are high, our economic education and exposure levels are very poor. Lack of proper English knowledge and major gaps in our education system complements this vicious cycle. As a direct outcome of these weaknesses, our voters are easily misled as they are not trained to analyse and evaluate information and have become victims of misinformation. As a matter of fact, our knowledge on matters of the economy has been significantly poor even though we produce a significant number of economic studies graduates in our higher education system. Their lack of a skill set to fit into our job market speaks volumes of the expired economic theory most of them have internalised after spending three to four years cramming and memorising. 

Whichever government that’ll be formed next week will have the same challenge of making Sri Lanka a developed nation. It is an economic reality, regardless of any party affiliation or any ideological affiliation, that we badly need to make our economy competitive.

Without bringing in the reforms to make our economy competitive and having the will and courage to pick the right policy choice to make it competitive, Sri Lanka will hardly have a future. The main problem why we can’t go for a serious economic programme is because our people simply do not want to. We have become victims of our own attitudes, behaviour, and misinformation. 

Only time will tell whether the new government has the will and courage for an economic reform plan. Irrespective of whether the government picks a strong and viable economic reform programme or not, our clock ticks faster and we have to live only with the hope that things will get better, till time really tells us.

No strategy will work until we work!  

The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.

Two ways the private sector has failed Sri Lanka

In this weekly column on The Sunday Morning Business titled “The Coordination Problem”, the scholars and fellows associated with Advocata attempt to explore issues around economics, public policy, the institutions that govern them and their impact on our lives and society.

Originally appeared on The Morning

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By Dhananath Fernando

There are two main models of growth and development, which have been discussed and used interchangeably. The state sector-led development model where the government maintains a fair share of businesses by expanding the state footprint is widely popular in Sri Lanka. The second model is a private sector-led model where private enterprises and individuals are provided the opportunity to lead growth and development. Interestingly, the state sector-led model doesn’t rule out the engagement of the private sector. Having a conducive environment for businesses, a high-doing business index, and maintaining a business-friendly environment have always been part and parcel of the promises made by political leaders including ideologues who favour a state sector-led model.

The state sector

In any business model, the main factor is “ownership” or the incentive to have ownership. Ownership comes in different forms, but in business, it is associated with risk. The higher the risk, the higher the gain. The person who risks their money, reputation, time and any form of capital has a natural incentive to recover it or make a benefit out of it. In private business, the individual or the shareholders have risked their private money (property) in the business, so they are psychologically driven to perform well, supervise their teams, recruit cutting-edge talent, and delegate responsibilities with the objective of growing together.

In the state sector, it’s different. The people who manage the specific organisation haven’t really invested any risk. They are just managers and responsible officers. So even if the business/organisation performs well or not, it hardly has any impact on them personally. They will not lose any private property or anything personal in the state sector business model. Instead, in a private sector investment, the investor and the person who takes the risk have so much to lose. In the state sector-driven model, the main source of money is taxpayer money, which was collected at different stages of the economy through imports, income, profit, etc.

As per the Sinhala folktale and anecdote, The Porridge Pot of Seven Villagers (aadi 7 denaage kanda haliya), no one is responsible for anything and everyone assumes the other person will perform. Ultimately, no one performs. When no one takes the responsibility, gaps are created for corruption. The question then arises: Without ownership or stake in your private property, why should someone take the risk of blocking corruption?

It is generally discussed that bribes are a necessity to be paid at all levels of a project/investment or else the project will be blocked at each stage from approval to functioning. This is a good example of the window for corruption that is caused by a lack of ownership. This is the inherent problem in the state sector model and the reason for its inability to improve productivity and efficiency.

Many Sri Lankans are of the view that the private sector running a business is equal to common people losing access to their common public property. A slightly different sentiment which is very deeply rooted in society is that when the state runs the business, it is more people-friendly and that prices tend to be more reasonable.

Also, government jobs are very popular during election times across all voters. Someone with basic mathematics can understand as to how unsustainable our state sector and state-owned enterprises (SOEs) are. According to the recent report by the Labour Department (1) (May 2020), about 1.2 million people work in the state sector. In addition, our SOEs are making eye-watering losses. According to the Committee on Public Enterprises (COPE), the total loss suffered by SriLankan Airlines from 2009 to 2019 sums up to about Rs. 240 billion (2), exceeding our expenditure on Samurdhi, our main social security programme for the poor, which is about Rs. 94.7 billion (3).

The private sector

While our state sector has really brought us to our knees, our private sector performance has been equally bad. There are about 3.4 million private-sector workers in Sri Lanka and another 2.7 million are own-account (self-employed) workers. More than 200,000 are employers. The private sector failed Sri Lanka miserably by adding burden on two fronts. One by burdening the common Sri Lankan by blocking the opportunity to consume good quality, reasonably priced, and competitive goods and services by hiding behind high import duties and adding most of the product categories into the negative list. When you impose a higher import duty for a consumable good, it increases the price of that respective product, making it impossible to compete in the local market.

As a result, consumers only have the choice to buy locally manufactured goods and services. Buying locally manufactured goods and services benefit these respective companies and local entrepreneurs. This can be argued as a good thing, but earning a profit by avoiding competition from the global stage and adding an additional cost to the Sri Lankan consumer to pay for the extra inefficiencies is unjustifiable. Instead, most in the private sector should be able to compete with global products by increasing their efficiency and productivity, rather than hiding behind government protection.

Below are some import protections and the numbers are extremely high. How can we justify an extra protection tax of 26.6% on a pair of school shoes, a protectionist tax of 19.6% on construction steel, and 53.62% on floor tiles and wall tiles in a country where the mean household income per month is Rs. 62,237 (4)?

Secondly, some businessmen are dependent on government contracts and licenses, creating an environment of symbiosis for corruption between politicians and the business community. Today, this has become a practice from national level to the local government level, and this is the private sector’s main contribution to taking mother Sri Lanka backwards. To keep this level of protection by higher import duties, most of the senior businessmen have to align with political powers. Even if Sri Lanka is to continue down the path of import substitution, our local products have to be competitive for this policy to succeed.

At the national level, high-level agreements, contracts, tax holidays, moratoriums, and loan reliefs have been provided by each government to their connected business circles. Instead of competing with technology and skills (except for a few players in apparels, rubber, tea, IT, and services), most business leaders have compromised their ethics, modesty, accountability, and genuineness over quick and short-sighted profit margins by avoiding competition at the global level. As a result, Sri Lankans have to pay the price for our domestic inefficiency, while the economy has become uncompetitive and irrelevant to global markets.

Some businessmen went a further mile to establish monopolies while hiding behind high import tariffs. Most of these private-sector monopolies rely on unethical business practices, giving rise to multiple situations of conflict of interest. They have pressured small players and have bought them over by unethical tricks or sometimes the use of power, rather than setting an example for Sri Lanka by empowering our youth to compete for ideas at the global level. Sri Lankan businesses have decided to remain isolated, being planted while isolating our consumers from access to world-class products that would improve their living standards significantly. Some Sri Lankan micro, small, and medium-scale businesses have been hindered from accessing world-class raw material and ingredients.

Another set of businessmen have been arguing on the need for global competition to all industries, except to the industry they are operating based on baseless excuses. One common argument is that the industry is at an infant stage, so they expect import tariffs or types of protectionism. But most of these industries are far from the infant stage. They have been in operation for more than a few decades.

The companies that were open for competition and competitiveness excelled and they extended their business to other parts of the world like India, Bangladesh, and Africa. This fear of competition in the vast majority of Sri Lankan businesses is one reason why Sri Lanka could not become a breeding ground for world-class businesses and have failed to operate beyond this tiny island. So now we have an extremely tail-heavy inefficient public sector and an equally protectionist political party-aligned business sector making all Sri Lankan’s suffer.

The solution for this is not moving back to the state-led business model, but to have an open mind to be open for competition. Till we reach that state of mind, Sri Lanka will suffer economically and continue to be irrelevant in global markets, while more graduates and youth will gather on our roads requesting more government jobs.

The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.

Why we can’t afford another lockdown?

In this weekly column on The Sunday Morning Business titled “The Coordination Problem”, the scholars and fellows associated with Advocata attempt to explore issues around economics, public policy, the institutions that govern them and their impact on our lives and society.

Originally appeared on The Morning

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By Dhananath Fernando

With the sudden spike in Covid-19 infections over the last few days, we have seen a re-emergence of discussion on a possible second wave. Globally, the Covid-19 numbers are increasing on the one hand, while countries have decided to resume activities on the other. However, when there is movement and interaction of people, there is a higher probability of the virus spreading.

Sri Lanka’s economy is at a stage where we can’t afford to face any economic shocks, given the bad economic fundamentals we have been practising over the years. The pandemic has re-exposed these weaknesses and for this, we might have to pay a considerable price as compensation for our past sins of economic mismanagement.

A second wave of the pandemic would bring in a significant array of economic challenges for both the developed and the developing worlds. However, Sri Lanka’s challenges are structurally unique as our economic problems have reached a boiling point.

Our economic problems at a boiling point

Relief schemes provided by the Government during the first lockdown and the economic revival measures scraped the bottom of our barrel, and the ability to absorb a second lockdown is a serious question.

We require foreign currency to pay our external debt at an average of $ 4 billion for the coming three years. Our exports have been declining over the years and Covid-19 has impacted the remaining markets; with a second wave, it will continue to bring new challenges. Our tax revenue is declining and rating agencies have downgraded our credit rating. As a result, investor confidence is low, making it difficult to raise money from markets even to roll over our debt and interest repayments.

Most of our workforce is in the Government and our government expenditure is burdened by salaries, pensions, and welfare structures. These welfare structures (Samurdhi relief, support for low-income differently-abled persons, financial support for the elderly, financial support for kidney patients, flood and drought relief, allowance for preschool teachers, etc.) are inefficient and ineffective. Our remittances, which is one of the main sources of foreign currency, are expected to decline further with Covid-19.

To manage the existing limited foreign revenue and foreign reserves, the Government has imposed import controls. The need to manage our foreign currency income is understandable. However, we cannot rule out the consequences of a further decline in government revenue and the impact this will have on our export industries. Furthermore, prices of consumable goods in the mid and long run are very likely to go up, making things further difficult.

How import controls hit govt. revenue and exports

According to 2018 statistics by the Ministry of Finance, 49% of government revenue was generated from import-based taxes. As per the Mid-Year Fiscal Position Report 2020, from January to April, over 55% of government revenue had been from import-based tax (savings from the lower fuel prices in the world market are one reason for higher import revenue). The Government extending import controls will result in a further decline in government revenue in the next quarter. While income is declining, our main expenditure items such as salaries and pensions are on the rise. Our recurrent expenditure – salaries (Rs. 253.8 billion), pensions (Rs. 79.8 billion), interest payments (Rs. 336 billion), and other payments (Rs. 150.7 billion) – are at Rs. 820 billion from January to April 2020, but our total revenue including a profit transfer from the Central Bank is at Rs. 476 billion. Calculations illustrate that after paying interest payments, we are running short of revenue to pay even our salaries and pensions, let alone other payments.

While import controls impact our national revenue significantly, it will have a higher impact on local businesses – just take computers, for example. If there is a restriction on computer imports and spare parts over time, we will face a challenge in replacing and upgrading the computers we use at present. Needless to say, this would affect the work of government offices and decrease our work efficiency as a significant proportion of the work is done through computers. This is just one example. We haven’t really felt the impact of import controls as we are still using existing stocks. Most imports we use for the moment are, to an extent, durable product categories, but in the mid and long term, people would feel the drop in efficiency and witness price increases.

The very same import controls impact our export businesses as most of the imports are used by local businesses to produce consumable goods and exports. (Think on the same lines of restrictions on importing computers.) The efficiency drop will impact the prices of exports to increase, making it difficult to compete in global markets. Industries like plantations will have further pressure to increase salaries with the high cost of living. Already many industries have indicated the difficulty to sustain their operations due to import controls. From the Government’s point of view, the need to manage the availability of foreign reserves is justifiable, but there will be significantly bigger costs and consequences to the local economy and the consumer.

Can we afford another lockdown?

Looking at the problems at hand and as all problems are reaching a boiling point, it is difficult to have another standstill in our economy. The only possible solution is to keep the movement of people between selected borders between districts or divisional secretariats while adhering to health guidelines, thus keeping the economy afloat running. Of course, the commute of the workforce between borders will have complications, but since most of us have hit rock bottom in our economic conditions, we are left with a very few alternatives.

The ideal solution for the foreign currency shortage is to secure a programme with the International Monetary Fund (IMF), as recommended by us. Such an IMF programme will require significant structural reforms. Another significant determinant by the IMF would be the need for a democratically elected government, meaning that a possible postponement of the election would be detrimental to seek such financial injections.

Probable solutions

The problems at hand have no quick fixes, and quick fixes will only worsen the current situation. First of all, we as a community should take precautions, adhere to all health and safety guidelines, and thereby stop contributing to the spread of Covid-19; we really can’t afford a second lockdown. Secondly, the problem with our economy is neither the high imports nor the consumption of imported goods – our problem is that our economy is not competitive or efficient. Our problem is poverty and the poor man or woman’s only tradable good is labour. There are limited or no opportunities to trade this tradable good called labour to earn a decent living as our economy is not competitive enough. Until we resolve this issue by setting our economic fundamentals right, our current crisis will exacerbate, also meaning that we cannot afford a second lockdown.

The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.

Sri Lankans’ common enemy is poverty, not each other

In this weekly column on The Sunday Morning Business titled “The Coordination Problem”, the scholars and fellows associated with Advocata attempt to explore issues around economics, public policy, the institutions that govern them and their impact on our lives and society.

Originally appeared on The Morning

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By Dhananath Fernando

We may worship different gods but as Sri Lankans, we all have one enemy – poverty. According to data on Sri Lanka’s poverty line, 4.1% of our population is “poor”, but nearly 50% of our population is eligible for the Samurdhi Programme. Another 1.4 million is employed in the government sector. Therefore, the majority of Sri Lankans are just above the poverty line.

This was confirmed recently by the World Bank (WB), when it downgraded us to a lower middle-income country from an upper-middle-income country, as our Gross National Income dropped in USD (dollar) terms. In other words, we have become poorer.

Our economy has grown by 2.3% in LKR (Sri Lankan rupee) terms but in reality, we have become poorer as our GDP growth in USD terms has dropped to the standard of living that existed in Sri Lanka in 2005. Even though we were an upper-middle-income country for a short period, Sri Lanka’s province-wise income told a different story. Apart from the Western Province, the other provinces were way below the upper-middle-income range. It is clear that our average income was skewed by Western Province data.

At a time when we have all become poorer, the last thing we need is to fight amongst ourselves based on cast, creed, religion, or ethnicity.

If you look at Sri Lanka’s history, our highest growth rates and higher levels of production were achieved when the country was in peace. Although there were many interpretations of it, after 2009, which saw the end of the civil war, the country experienced tremendous growth rates above 7% with the Northern and Eastern Provinces joining the national economy. 

However, unfortunately, we failed to establish the fundamentals of our economy post-war, and we have been paying constantly for our early mistakes. We only reaped the advantage of ending the war but we failed to utilise the opportunity to put in place basic fundamentals such as incentive structures, competitiveness, and price-based mechanisms in our economy. Till we establish that basic building block, we will have to go back and forth, and will not be able to experience sustainable growth to defeat our common enemy – poverty – and reach high-income status. 

An encouraging work environment as a country 

A country with a motivated workforce is one determinant the next Government needs to establish if we are serious about a prosperous Sri Lanka. Political parties may be victorious after the election but making Sri Lanka a victorious nation goes far beyond just securing a winning majority at an election. Winning elections is the same as an opportunity to play a cricket match representing the national team. In order to make Sri Lanka prosperous, it needs to put in a game-changing performance that ends in victory. A motivated workforce can only be built on unity between all Sri Lankans so that we can all work as one team, resulting in increased productivity. According to Frederick Herzberg’s Two Factor Theory (of Motivation), there is a hygiene factor instead of a motivator and in the absence of hygiene factors, people get demotivated easily. The biggest loser from tensions between the people and racial disharmony will be our economy, a fact that has been proven throughout history.

Most aspirational Sri Lankans are now tired of experiencing lost economic opportunities and revisiting these never-changing issues. Aspirational Sri Lankans expect to work harder, have better living standards, and to not be entangled in micro issues.  

The recent downgrade to lower-middle-income status has a greater impact, after the Easter Sunday attacks and tensions we witnessed thereafter. Even before the Easter attacks, the riots in Digana and internet blockages were indicators that alerted us about tension between ethnicities – a move in the wrong direction. International investors need stable and peaceful destinations to invest their money. Internal ethnic tensions and communal disharmony tend to scare away potential investments that could drive domestic economic growth.  

This phenomenon is key, among many other reasons, for our lethargic performance on the economic front over the last few years. Recent incidents connected to licensed banking institutes, which were shared widely over social media, highlight that tensions still prevail. If allowed to grow and fester, the price we all have to pay for these untreated wounds will be enormous. All Sri Lankans as well as the Government should understand that a peaceful, secure environment with a motivated and skilled workforce is a basic requirement for a small island nation of the calibre of Sri Lanka.

What should be our strategy and solution?

As outlined in this column, and as many other intellectuals have highlighted repeatedly, Sri Lanka’s strength is in its location and connectivity. Our weakness is that we are a small market and our resources are limited, while the available resources are not optimised. So we are left with no other strategy but to produce for a bigger market than our 22 million people and be competitive on all we produce by global standards. However, we cannot be competitive without having our house in order. 

Our success as a country depends on our ability to understand other people’s needs and the ability to provide goods and services for their needs and address gaps in the market. If we produce only for ourselves and for our own consumption, isn’t it a very short-sighted and selfish approach, which will limit us from reaching our full potential? 

If we blindly follow some trends in the US and other parts of the world which have far bigger domestic markets and very different economic indicators, we will be wasting our advantage of connectivity and location while also expanding our weakness as an isolated and divided society. 

As Frédéric Bastiat said, “when goods and services don’t cross borders, soldiers will”. We should ensure all Sri Lankans engage and trade with all Sri Lankans, beyond manmade intangible borders such as caste, creed, ethnicity, and religion. At the same time, we should trade beyond our shores and country borders if we are serious about making Mother Lanka prosperous again and defeating our common enemy – poverty. 

The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.

Our public universities need more scrutiny, not blind endorsements

Originally appeared on The Daily FT

By Dr. Sujata Gamage

Dr. W. A. Wijewardena recently published an article on the technology campus of the Sri Jayewardenepura University. I looked forward to new information on the State technology education, but I was sorely disappointed. His column was essentially a pitch for the Acting Vice-Chancellor of Sri Jayewardenepura. Interestingly, there have been several such pitches recently for the university itself. On a positive note, it is good that a university tries to justify the public expenditure incurred on it, but in the absence of a counter assessment, these advertorials could be window dressing for a rotten system. 

There are serious issues in education confronting the country today. Our priority from a development perspective should be the preparedness of 360,000 or so youth who turn 18 every year. They should be prepared for living and working in the 21st century. The rest is details, I would say, because it is well established that the economic or social impact of education almost exclusively rests on school education, according to an extensive review of the literature by Alison Wolf in her 2003 book ‘Does Education Matter?: Myths About Education and Economic Growth’. While a highly educated few may contribute to innovation in the economy or society, mass higher education has no impact. A World Bank (WB) study of the same subject has shown that private benefits to higher education are many times greater than public benefits (WB, 2015). 

Yet, our education system is designed to define education as success at receiving three passes for a paper and pen test at the end of 13 years of education. Then we select 10% or less of a cohort of such students for a free-of-charge education at public universities, leaving other 90% off the radar of policymakers or the public. The Tertiary and Vocational Education and Training (TVET) sector admitted 35,599 students (CBSL, 2018). Yet, I would include those attending the TVET institutions within 90% who are ‘off the radar’ because the TVET sector which is a distant poor cousin to the university sector is barely visible. 

University education captures a lion’s share of education funding and media attention. Apparently, a discussion on amending universities have resurfaced as it does periodically. Such a discussion is like trying to change the deck chairs while the tertiary education ship is sinking. 

The University Grants Commission regulates 15 public universities and associated institutes. The Technical and Vocation Education oversees 500+ state institutes (not counting 700+ private institutes) enrolling 35,000+ students for short or long courses, graduated about 26,024 National vocational Qualification (NVQ) certificate holders. These institutions receive Government funding no matter their performance. 

What we need is a new commission which is a caretaker for all school leavers seeking a tertiary education and or training, not gatekeepers or apologists for underperforming institutions. These reforms will not happen unless the government overrides the interests of the higher education lobby. 

Overly influential higher education lobby

Education funding in this country is driven by three powerful lobbies, The GMOA, the University Community, and Inter-University Federation of University Students, a political arm of the JVP and/or the Peratugami Party. They serve to keep spreading the myth that free-of-charge education to a select few youth is free education, and policymakers and the media swallow the myth wholesale.

Their solution for the other 90% of youth is more and more public spending for education. Yes, it’s true that our education funding is way below international standards. As UNESCO noted: The Education 2030 Framework for Action proposed two benchmarks as ‘crucial reference points’: allocate at least 4% to 6% of GDP to education, and/or allocate at least 15% to 20% of public expenditure to education. Globally, countries spend 4.7% of GDP on education and allocate 14.2% of public expenditure to education; 35 countries spend less than 4% of GDP and allocate less than 15% of public expenditure to education (GEM Report, UNESCO)

Higher education interest groups lobbied for increased in education funding. However, the benefits did not go school education or the TVET sector because education funding formula is unduly tilted towards higher education at the expense of school education or TVET. The result is that university teachers are well remunerated now, and schoolteachers remain some of the poorest paid public servants.

Over-funding of universities

Our universities indeed receive a lion’s share of education funding in relation to international practices in education funding. As far back as 2002, the World Bank (WB) noted that our funding is unduly tilted toward universities. 

By international standards, average recurrent education expenditures per student in Sri Lanka are modest at primary and secondary education levels, but high at the tertiary education level. Average recurrent education expenditure per student as a share of national income per capita on primary and secondary education, at about 9% and 11% respectively, are among the lowest in South Asia and East Asia. In contrast, average tertiary education expenditure per student as a share of national income per capita, [set] at 100%, is slightly higher than India, and substantially above the level in East Asian countries such as South Korea, Singapore, Malaysia, Thailand, Indonesia and the Philippines. The main reason for the high share of public recurrent spending on tertiary education is the large unit cost of government universities. Overall, the pattern of average recurrent expenditure across education levels suggests that, in contrast to high performing East Asian countries, the balance of public resources in Sri Lanka may be tilted unduly in favour of tertiary education, at the expense of primary and secondary schooling (WB, 2005, Sec 16).

The internal efficiency of primary schooling (grades 1-5) and junior secondary schooling (grades 6-9), measured in terms of flow rates, are high (WB, 2005, Section 18). 

Public university education in Sri Lanka is expensive, with high unit operating costs in comparison to other developing countries. In addition, there are wide differences in unit costs among public universities, ranging from about 40,000-120,000 rupees per student per year (WB, 2005, Section 20). 

If education funding was titled in favour of university education in 2002, it is no better in 2019, according to our estimates.

The distribution of gross funding for education across the three sectors has widened since 2002. In 2002 Higher education received 14% of education funding. In 2019, this share increased to 38%. Funding for TVET sector too increased while the share for school education reduced to 50%.

It is true that new admissions to higher education have increased from 12,144 in 2002 to 31,451 in 2018, and new admissions to school education have slightly decreased from 328,632 in 2002 to 325,667 in 2018. We are still in the process of calculating the recurrent education expenditure per student as a share of national income per capita for 2018, in order to reassess funding situation vis-à-vis WB assessment published in 2005. However, a quick calculation of per-student funding for universities v. schooling shows that per capita spending remains as tilted as reported by WB in 2005. 

The problem lies in misplaced priorities. First, education achievement after 13 years of schooling is defined by the ability of a student to obtain passes for any three subjects in a national examination. As tuition teachers have revealed, a student can study for six months to obtain the necessary passes. Further, the government indirectly admitted that education is driven by private tuition by bending over backwards to change health regulation to suit private tuition needs. 

Next, we increase funding for higher education to accommodate these students deemed suitable for higher education by a faulty indicator. In fact, we are trying to find solutions to a poor output at the end of the pipeline without investing adequately in the pipeline.

The evidence is strong that mass higher education does NOT contribute to development. Only research-driven higher universities have an impact. Hence, the priorities for government spending is clear. Quality school education, some further education or training for all youth, and research-based or inquiry-based higher education for a select few. 

Unaccountable

University teachers who justify the expansion of public higher education point out that all higher education in developed countries are provided by the state. This is true indeed. In Canada or the UK, almost all universities are publicly owned. In the US, private institutions co-exist but the federal government supports the education of all students, though loan schemes. 

The comparison ends there because in Sri Lanka students are brought to the doorsteps of the universities. They come with public funds assured for their education, but there are no performance requirements for universities. Universities decide what courses to offer, how they teach, and they refuse to be held accountable for unemployability of graduates or the attitudes of these graduates. In US, USA, or Canada, public institutions receive funding based on enrolment and additional performance criteria. Retention and graduation rates of students are some such criteria. In Sri Lanka, a shockingly high percent of students dropout and the government does not to track that. 

Further, in public higher education in other countries, the students pay a share of the cost of education. For example, at Ohio State University where I worked as a strategic planning specialist, the budget consists of roughly about one-third of cost recovered through student tuition fees, another one third though state subsidy, and the other one third through income generated through research funding, alumni giving etc. In the UK and Canada too, students pay a share of the cost of higher education, giving universities another good reason to be accountable. 

UGC – a commission past its time? 

The University Grants Commission was established in 1978 in the tradition of granting agencies in UK and India. The University Grants Commission of India continues to function but similar commissions in UK and eve USA have changed their roles.

In the nineties, the role of the Ohio Board of regent (OBR) was essentially the same as the UGC. Later, the OBR increasingly took on more responsibility for colleges and community colleges in the state, and today it is reborn as The Ohio Department of Higher Education with the mandate to “make college more affordable for Ohioans and drive the state’s economic advancement through the public universities and colleges of Ohio, the state’s network of public universities, regional campuses, community colleges, and adult workforce and adult education centres”. 

The UK has gone a step further:

The Higher Education Funding Council for England (HEFCE) distributed public money for teaching and research to universities and colleges. It closed on 1 April 2018. [It was] replaced by UK Research and Innovation [Agency] and the Office for Students.

This move in the UK is very significant. It is an acknowledgement that research and innovation and mass higher education do not belong together and that higher education agencies should serve the potential and current students, not the provider institutions. 

Need a commission for students, not gatekeepers for institutions

The UGC of has 15 institutions and 19 other associated institutes. These institutions awarded 26,024 basic degrees in 2018. The Tertiary and Vocational Education Commission (TVEC) is responsible for the registration and accreditation of TVET institutions. TVEC reported 582 public institutions and 50,215 National Vocational Certificate awardees for 2019 from public institutions. We have 350,000 +school lavers who have left school at various points. Taken together these institutions cater to needs of about 20% of a youth cohort. What about education and training for others? The government may offer merit-based opportunities for some, but there should some accountability for others. What we have is a government that allows the higher education lobby to disrupt the education for the other 80%. 

The present government is on the right track, more or less

As I pointed out, our universities receive an undue share of public funding thanks to a powerful higher education lobby. This situation must be corrected. Any additional funding for education should be directed to school education and 1-2-year colleges offering diplomas or advanced diplomas while holding funding for universities at present levels. On the other hand, funding for research and innovation should be increased with centres of excellence within or outside of universities getting additional funding from the research and innovation budget. 

In the present government, the higher education, technology and innovation portfolios are brought together. Bundling technology and innovation with higher education is unwise because higher education priorities are driven by a self-inflicted responsibility to find slots for students obtaining three passes from an outdated assessment system. New programs like the technology campus at Sri Jayewardenepura will not be able to perform miracles to produce innovators. They will more likely than not produce more job seekers. 

However, it is encouraging that the President has inquired about the feasibility of bringing all education functions under one ministry. This is good news. What we need is a ministry of education that oversees the education for all from early childhood to tertiary education, and a separate ministry of science, technology and innovation that funds centres of excellence in universities and elsewhere and nurture and award scholarships to select set of promising youth for a research-based or inquiry-based university education.

Dr Sujata Gamage is a Senior Research Fellow at LIRNEasia, a regional think tank based in Colombo, Sri Lanka. She specializes in planning, evaluation and capacity building in education, ICT in education, research and research networks, and public sector performance using data analytics, institutional research, scoping studies, systematic reviews, statistical methods and simulations. She is also an advisor to the Advocata Institute.

The myth: Self-sufficiency guarantees food security

Covered in the Daily Mirror, Ada derana and Colombo Telegraph

By Sathya Karunarathne

The novel coronavirus which drove cities and countries into lockdown has now sparked anxiety over a possible food crisis given the increase in export and import bans and disruption of global food supply chains. 

This uncertainty has left the Sri Lankan government to question whether these disruptions would affect food security in the near future and if ensuring self-sufficiency is the absolute and undisputed solution to this conundrum. In this attempt to achieve self-sufficiency in food the government has resorted to import substitution to strengthen domestic production.

Keeping in line with these protectionist policies the government has indefinitely extended import controls that were initially introduced on the 22nd of May for three months “to be in effect till further notice”. Import controls in this degree and nature have not been seen since the 1970s and this has led policymakers and public debate to be heavily inclined towards the possibility of revisiting and reconsidering the socialist policies adopted by the Bandaranaike government.

How credible is the popular narrative?

The renewed vigor attached to closed economic policies and food protectionism through public discourse is perhaps understandable. Amidst a foreign exchange crisis in April, the government imposed import restrictions on 156 categories of products including essential food items such as rice, flour, and sugar. 

Although import restrictions on most of the essential food items have been removed, temporary restrictions have been extended indefinitely on grains, stainless steel tankers and bowsers needed for the distribution of milk and blast freezers needed for preserving poultry meat. While these restrictions have been put in place with the motive of protecting the depreciating rupee it carries a massive potential to further harm the domestic distribution and storage of food which is already in a fragile state.  

Moreover, the latest Climate and Food Security Monitoring bulletin of WFP (United Nations World Food Programme) raises concerns of food security among vulnerable parts in Sri Lanka as a result of the impact and control response of the COVID-19 outbreak. The report further elaborated that weather-related shocks combined with poor hygienic and sanitation conditions could result in an increase of acute malnutrition in the island.  

In response to these growing anxieties in the wake of the COVID 19 pandemic, the government put in place programs and policies to ensure self-sufficiency in food within the island. On the 28th of May, the government approved the importation of 2,500 dairy cows from Australia. The motive behind this decision as stated by the cabinet spokesman is to ensure Sri Lanka’s self-sufficiency in milk by 2025, even though this measure failed just over a year ago with the death of 500 imported heifers that were ill-suited to Sri Lanka’s climate.

Furthermore, restrictions on maize imports that were imposed with the intention of strengthening domestic production has resulted in a lack of maize as feed for chicken. Available alternative feed is not as nutritious for poultry and has affected the quality and production of eggs. Egg production has fallen from 200-300 eggs per year from chicken to 200-240 eggs per year.  With the fall of production, prices have picked up.

On the 3rd of July, Senaka Samarasinghe, Managing Director of Harischandra Mills PLC stated to Ada Derana that import restrictions imposed on agricultural products such as ulundu, black-eyed pea, big onion, red onion, green gram, peanut, corn, and dried chili have affected manufacturers adversely resulting in a massive drop of production. 

These import restrictions have severely affected manufacturers who rely on ulundu as a raw material to produce products such as papadam, flour, thosai, wadai and dhal. Given the lack of raw materials, Harischandra Mills PLC has had to reduce their production by a staggering 90 per cent. Sri Lanka’s domestic ulundu requirement per year is about 12,000 metric tonnes (mt). The production of ulundu domestically has reduced to 5000 mt due to the drought. External factors that affect the domestic supply of food such as these calls for imports to fill the output gap. 

These import restrictions have adversely affected Sri Lanka’s already fragile export sector as well, as manufacturers have failed to meet the demand of international markets for products such as thosai mix. Harischandra PLC exports 15 per cent of its thosai mix to markets in Europe, North America, Asia, and Australia. These protectionist policies that aim to protect the domestic producer and to strengthen their production, have resulted in achieving the very opposite of its intentions as small scale producers of ulundu have opted to close down resulting in reduced shop sales. Moreover, the ban has affected the production of kurakkan flour with producers resorting to completely stopping or reducing production. This fibre-rich alternative to wheat flour is widely consumed by diabetic patients and is an important part of their medically recommended diet. 

It is no doubt that the pandemic has brought to light the extreme vulnerability of Sri Lanka’s domestic food supply to external shocks. These policies have a demonstrated history of achieving quite the opposite of their intentions. The ’70s “produce or perish” economy is an excruciating reminder of this fact as bug-infested flour, hardly edible bread, and stone infiltrated rice was every Sri Lankan’s staple. Therefore the popular narrative that promotes restrictive policies has zero credibility as it will only tighten the already constrained food supply by repeating the mistakes of the past. Long term policy solutions to the crisis, therefore,  should focus on the sustainability and practicality of isolating the island from global trade and food supply chains and producing the bulk of our dietary needs domestically.

Sustainable approach to attaining food security: Lessons from Singapore

The Global Food Security Index (GFSI)  ranks countries’ food security based on food affordability, availability,  quality as well as an adjustment for natural resources and resilience.  Singapore was able to secure the title as the most food-secure nation for two consecutive years, with a high rank in all three core pillars. 

Singapore’s success is attributed to the government’s continued commitment to stay connected to global food supply chains and to strengthen local production. Singapore diversified its food import sources from 140 countries in 2004 to more than 170 countries and regions in 2019  making the country’s food supply chain more resilient and has set a “30 by 30” goal to produce 30 per cent of the country’s nutritional needs by 2030. Diversifying food imports and making the country’s food supply chain more resilient are two sustainable policy solutions through which Sri Lanka can ensure long term food security. 

The Food and Agriculture Association of the United Nations (FAO) states that the crisis we are facing is a global problem that requires a global response.  This calls for governments to collaborate to avoid further disruptions to food supply chains. Import diversification in the context of food security refers to increasing the number of countries from which we import food. 
This ensures an undisrupted inflow of food supply into the country ensuring both physical availability and choice of food in crisis situations. Import diversification is effective even in ordinary situations as loss in the harvest of one exporting country will not threaten the availability or supply of that particular product/produce for the importing country. Singapore imports over 90 per cent of their consumption needs with only 13 per cent of vegetables and 9 per cent of fish being produced locally.  

Moreover, in order to avoid disruptions to the supply chain that may occur by depending on a single major import supplier Singapore has resorted to promoting frozen and powdered product alternatives. Sri Lanka cannot resort to these options by restricting the importation of freezers, tankers, and bowsers that are necessary for such alternatives.

The world is highly globalized and so are food supply chains. Isolating from this interconnected food supply chain will only exacerbate Sri Lanka’s food insecurity. This was evident in the 2007-2008 global food price crisis when export restrictions put in place by exporting countries to increase food security domestically led to serious disturbance in the world food market resulting in price spikes and increased price volatility. In a more local context, this was evident when the government banned the importation of turmeric along with other non-essential goods which led to a scarcity and the available being sold for an exorbitant price ranging from Rs 300-350/- per 100 g despite a maximum retail price of Rs.75 per 100 g. 

Eradicating weaknesses and inefficiencies in the domestic food supply chain is essential to ensuring food security within a country. This is referred to as building a resilient food system domestically. The Food and Agriculture Organisation of the United Nations (FAO) defines food security as follows: “Food security exists when all people, at all times, have physical and economic access to sufficient, safe, and nutritious food that meets their dietary needs and food preferences ”.  The abrupt lockdown and curfew COVID-19 brought revealed that our domestic food supply chain does not offer economic or physical access to nutritious food. This was painfully apparent when people desperate to eat set off a stampede during a cash handout held in celebration of Eid, leaving eight injured and three killed. 

This is an obvious cautionary alarm to the government to fix the inefficiencies of the domestic food system and to enhance emergency food assistance to the vulnerable communities, who most often end up bearing the brunt of such inefficiencies. Every crisis presents an opportunity to focus on rebuilding through a novel lens. This presents an opportunity for Sri Lanka to rethink its approach to food security and to branch out our policy solutions to more sustainable and timely options.

Solution 

This crisis has proved that import restrictions and heavy gravitation towards self-sufficiency cannot solve the myriad of issues plaguing the country’s food supply system. Closed economic policies to achieve self-sufficiency, do not guarantee all citizen’s economic and physical access to nutritious food nor do they guarantee a resilient domestic food supply chain. 

Investing in cold storages and strengthened logistics networks, shifting towards climate-smart agriculture, ensuring the supply of raw materials and agricultural equipment by making the eligibility verification process for tax exemptions less complicated and improving ease of doing business, removing import restrictions on veterinary medicine, chemical fertilizer, and other inputs,  relaxing restrictions on the cultivation of crops, strengthening emergency food assistance to vulnerable communities with linkages to local and provincial governments can be stated as policy priorities that can address the inefficiencies of the domestic food supply chain.

The way forward to ensuring the island’s food security is in improving internal inefficiencies while recognizing the extreme and timely importance of staying connected to global food supply chains through relaxing import restrictions and multiplying our food and raw material import sources. 

Sathya Karunarathne is a Research Executive at the Advocata Institute and can be contacted at sathya@advocata.org or @SathyaKarunara1 on twitter. Learn more about Advocata’s work at www.advocata.org. The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute

The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.

The pre-election opportunity ECT presents the President

In this weekly column on The Sunday Morning Business titled “The Coordination Problem”, the scholars and fellows associated with Advocata attempt to explore issues around economics, public policy, the institutions that govern them and their impact on our lives and society.

Originally appeared on The Morning

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By Dhananath Fernando and Shanaka Paththinigama

The East Container Terminal (ECT) has come into the limelight again.

Last week, a strike was ongoing by trade unions demanding to install gantry cranes, which were ordered a few years ago and which are now in the Colombo Port, at the ECT.

This was followed up with the Cabinet Spokesperson stating that it was “allowing the respective line Minister to conduct discussions at a diplomatic level on changing (the) Colombo Port Terminal deal with India and Japan”, according to Hellenic Shipping News Worldwide.

Subsequently, the Gantry Cranes were permitted to be unloaded and installed on the instructions of Prime Minister Mahinda Rajapaksa and the port workers decided to call off their strike on Thursday (2).

The fact of the matter is that the ECT is one absolute failure in terms of “getting things done”. Sri Lanka has been running it continuously and like many other economic issues, we have failed at getting our act together. This is despite being located at the heart of a strategic maritime route. Rather than taking advantage and converting the ECT to an operational level, we have lost a reasonable amount of credibility in the business world by opening the ECT for bidding and cancelling the bidding process on multiple occasions, thereby creating years of operational delays based on political favours. We hope, at least this time, Sri Lanka will be able to convert shop talk into actionable outcomes.

Understanding the shipping business

The shipping business is a technical subject and is very complicated. Ports are strategic geographical locations which are situated at the edge of oceans, seas, rivers, or lakes. These locations are then developed to provide facilities for the loading and unloading of cargo ships. The facilities provided for a port depends on the purpose for which the port is being used. A terminal refers to the set of facilities at a port where the loading and unloading of the cargo/container takes place. Terminals are named on the basis of the type of cargo that can be handled by it. Some of the most common types of terminals are container terminals, bulk cargo terminals, and LNG (liquefied natural gas) terminals.

Simply put, in one port, there are multiple terminals and the Port of Colombo has a few container terminals (CICT – Colombo International Container Terminal, JCT – Jaya Container Terminal, SAGT – South Asia Gateway Terminal, and UCT – Unity Container Terminal).

Global trade and most merchandise exports and imports account for a greater share of container terminals. The main factor that drives this business is efficiency and the networking ability to bring as many vessels as possible to the respective terminal. Simply put, when a ship enters the port/terminal how fast we can handle the containers and cargo (efficiency) and how networked we are to bring more vessels into the terminal are the two main determinants of making the business profitable.

Like most businesses, the price or the cost is a key determinant. To be profitable and bring the price down, over the years, shipping vessels have advanced to a point where there is capacity of more than 10,000 TEUs (20-foot equivalent units) in one vessel and those models (New Panamax – 12,500 TEUs | Triple E – 18,000 TEUs) have become popular with the development of global trade. These gigantic vessels can only be managed by deepwater ports which have a depth of more than 18 metres.

What’s all the fuss about the ECT?

There are two deepwater ports in the Colombo Port. One is CICT (85% owned by the China Merchant Port Holdings [for a period of 35 years, starting in 2013] and 15% by the Sri Lanka Ports Authority [SLPA] [owned by the Government]), which contributes to a higher share of the capacity and efficiency of the Colombo Port. The other deepwater terminal is the ECT. This is why the level of interest in this port is very high.

Geopolitical rivalries China, Japan, and India continue to seek operational ownership of the ECT through companies of their respective countries. The JCT (owned by the SLPA), SAGT (owned by John Keells Holdings – 42% , Mearsk – 26%, SLPA – 15%, A.P. Moller – 7%, Evergreen – 5%, and other investors – 5%), and UCT (owned by SLPA) are all shallow-water port terminals which can only handle smaller vessels (not economical compared to larger vessels) with about 10,000 TEUs capacity.

The ECT’s value is very high as it’s the only other deepwater terminal in the Port of Colombo except for CICT. As an additional benefit, it is located in the middle of the old port and the modern port, providing an added advantage for the movement of inter-terminal cargo, given its proximity to other terminals.

Despite the ECT having significant strategic value, consecutive governments have been just sitting on this, calling for bids and cancelling them, while competition is increasing every day – notably, the new Sagarala port development initiative by India, the construction of the Enayam Port in nearby Tamil Nadu, and also the Kerala Port, which is soon to be the world’s deepest multipurpose port.

With the agreement with SAGT due to expire in 2030 and with India developing their ports, the ECT has become a vital business asset as never before. Another deepwater port terminal operator adjacent to CICT will create more competition. However, the networking and other variables will matter to whoever gets the bid for the ECT.

At the same time, with the growth of global trade (not considering the effects of Covid-19), the Colombo Port is nearing full capacity of handling containers. The Port of Colombo moved to the top position of the Fastest Growing Port Index in the first half of 2018 by industry analyst Alphaliner and is one of the most connected ports in the entire world, handling about seven million TEUs in total. It is vital that the ECT is developed to maintain this growth.

Despite being situated in the centre of the Indian Ocean, and even though we are one of the most connected ports in the world, we are far from becoming a maritime hub. The root cause lies in our inability to be competitive and inadequacy to provide ancillary services such as logistics, bunkering, marine lubricants, fresh water supply, offshore supplies and ship chandelling, warehousing, and many more.

Our rules, regulations, and legal structures on the ownership of some shipping-related services and excessive government intervention, with the government acting as a player in the market and a regulator at the same time, has closed the space for private investment which could propel the Colombo Port to becoming a key global player.

Most experts have become weary of speaking about the same issues, while the opportunity of becoming a maritime hub in the Indian Ocean is slipping out of our hands.

Since the shipping business is based on efficiency and networking, the ECT has to be operated by a private operator and the Government should play a regulatory role and facilitate businesses by being the landlord of the port. This must be done while keeping the ownership of the port rather than trying to engage in the business and be a container terminal operator. Container terminal operation requires sizable capital investments. Private investments, which take the risk for the capital they invest, is the only possible way to create the right incentive structure and create the drive for efficiency and a very competitive business model.

Selecting a good terminal operator

After going back and forth, the previous Government signed a Memorandum of Co-operation (MoC) between Sri Lanka, India, and Japan. According to media reports, the current Government expects to discuss changes to the initial agreement, claiming that the previous deal was unfavourable for the country, and move to a new agreement.

At the same time, the SLPA unions claim that gantry cranes worth $ 25.7 million have been purchased for the development of the ECT, but concerns have been raised over the specifications of the cranes.

We really don’t know the truth

However, His Excellency the President, who received 6.9 million votes for a system change, should explore a method to select a proper operator. Undoubtedly, rather than handpicking operators based on introductions given by individuals, it has to be on a competitive bidding process, based on cost and pricing to ensure the competitiveness of the port with proper specifications. That’s the best system we can employ to find the most suited operator in a price-competitive industry.

Generally, Build-Operate-Transfer (BOT) agreements are provided with long tax holidays and the taxpayer has to be protected and prioritised as it is the people who gave the mandate for a system change.

At the same time, when the existing terminal operators bid for the project, their existing capacities and advantages need to be reflected in their pricing, investment, and proposal structure. The system change expected by the taxpayer, in this case, is to set up a system to ensure accountability and that things get done while getting the maximum benefit to the port and by establishing a level playing field for businesses and investors.

In countries like Sri Lanka where discussions revolve around high-value government transactions, there is a higher risk of such projects being influenced by many powerful businessmen and bureaucrats, leading to irregularities and corruption.

The President and the Government now have an opportunity to prove such assumptions wrong and set a prime example of how such a high-level transaction can be transparently managed. A single transaction with a conflict of interest can make a regime unpopular faster than anyone can expect. The Central Bank Bond irregularity is the most recent example.

On the verge of a crucial election and with the prospect of forming a fresh government, we hope Sri Lanka would move forward instead of dragging its feet on the ECT by ensuring and implementing a competitive bidding process (which will help avoid most of the geopolitical pressures) without getting sandwiched in between two global economic powers vying for regional dominance.

The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.

Import controls - out of control?

Covered in the Colombo Telegraph

By Erandi de Silva

As the COVID-19 virus forced much of the world into lockdown, the scale of interdependence and reliance on trade across nations was apparent by the global urgency to re-open economies as soon as possible. The shortage of goods and loss of income experienced due to the disruption of supply chains helped some nations realize that a country typically stands to lose more than it may gain by being shut out from the global market. Sri Lanka continually increasing import controls and locking itself out of trading networks then begs the question, why are we punishing ourselves? 

A common justification in people’s minds may be that difficult times call for difficult measures; curbing imports may seem inevitable amidst the current health crisis caused by a contagious virus and the financial threat of a depreciating currency. However, as elections are approaching, it appears these decisions are primarily driven by political and not economic motives. Given that Sri Lanka’s exchange rate became a key campaign topic in the last election, the current rise in import controls seems to be an attempt at artificially maintaining a “strong” currency prior to elections after the excessive money-printing in March this year. 

Furthermore, such decisions should also be recognised as far more than precautionary policies due to the pandemic, and rather, a projection of the national tendency to revert to protectionism. The ban placed on maize imports in mid-January (prior to when the first case of coronavirus was reported in Sri Lanka) indicates this predisposition. Sri Lanka exhibits a recurrent desire - often fueled by nationalistic rhetoric - to boost domestic production or even become self-sufficient across various sectors and industries, sometimes in complete ignorance of comparative advantage and practicalities. This is evidenced in the aftermath of importing 5,000 milk cows in order to boost local dairy production in 2017 which led to many farmers accruing debt whilst over 400 cows died due to poor living conditions. Not only did it result in Sri Lanka still importing; this method was more expensive because now money had to be spent to feed and care for the cows in the absence of their natural habitat. Despite this result, the new Government again approved a proposal to import 2,500 cattle from Australia on the 1st of June this year in the hope of curbing milk product imports to Sri Lanka.

In the case of import controls and such protectionist actions, problems tend to manifest regardless of the intentions behind the implementation of such policies. For example, the maize embargo which was imposed with the intent of accelerating domestic production and protecting local farmers has led to several adversities - now including a shortage of supply. It is important to note that the brunt of the outcome was faced by a vulnerable stakeholder that the Government aims to protect: small-scale poultry farmers. As the main consumers of maize (because it is needed for chicken feed), poultry farmers were initially forced to pay higher prices to obtain maize and were at the mercy of Sri Lanka’s oligopoly of grain collectors. The problem was exacerbated as domestic stocks of maize withered away and suppliers could not import to fill the deficit. According to the Export Development Board, Sri Lanka imported 102,461.175 metric tonnes of maize in 2019 despite domestic production for the year being at 245,647 metric tonnes. This clearly reflects that the local demand for maize is far greater than the domestic capacity for maize production. Another example of unintended consequences can be extracted from the confectionery industry which recently expressed concern regarding the inability to access imported raw materials that are necessary for cost-effective local production. The 340% special commodity levy on block fat and margarine imports which was introduced this month has led to significant strain and job-insecurity within the industry. 

The new administration recently reiterated their pledge made under the ‘Saubhagya Dekma’ policy statement of turning Sri Lanka into a “people-centric production economy”. Despite his claim that limiting imports has “paved the way” for a production economy, it is necessary to understand that even most local businesses require imported materials in order to produce. The latest statistics from the World Bank indicate that 38.19% of our total merchandise imports are intermediate goods that are used locally as inputs for production. Regardless of our ambitions, Sri Lanka’s economy requires imports for growth. Many of our consumables are imported and local businesses, including key exporters such as the textile industry, use imported raw materials. Curbing imports will impede the ability of local businesses to cost-effectively grow.

If the Government fails to readjust its policy on import controls and continues down the path of increasing protectionism post-COVID-19, Sri Lanka may continue to face economic instability and revenue loss within the sectors that are affected by these constraints. Ultimately, despite the rhetoric and propaganda of “saving local businesses” and creating a brand of “made in Sri Lanka” that enamours the public during political campaigns, it is often the most vulnerable within local businesses that stand to lose the most from the enactment of protectionist policies. As poultry farmers struggle to maintain their income and employees within the confectionery industry remain anxious about the status of their jobs, the question remains: why are we punishing ourselves?

The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.

Reform for our micro and small businesses

Covered in the Daily FT and Daily Mirror

By Aneetha Warusavitarana

Last Saturday was the UN World Micro, Small, and Medium Enterprises Day, and in light of that, focus should be given to Sri Lanka’s small businesses and the challenges they face. 

Sri Lankan micro and small enterprises form a substantial part of our economy. Sole proprietorships account for 63.1% of all businesses in the country, and account for 27.1% of national employment (Department of Census and Statistics). However, they face a myriad of challenges and this focus on improving their business environment is welcome. As highlighted in a study conducted by the Advocata Institute on the regulatory barriers faced by micro and small enterprises, the three main challenges faced are access to finance, labour, and rent.

In addition, 45% of micro-enterprises and 10% of small enterprises remain unregistered, exacerbating these problems. Unregistered businesses are excluded from formal sources of finance, business networks, and do not qualify for Government assistance. 

In early March this year, the Cabinet approved the establishment of ‘one-stop shops’ for micro and small businesses in Sri Lanka. This project is now moving forward, with the Government working with the EU to set up these ‘one-stop shops’ in each district; with the aim of streamlining the registration process and providing assistance on issues of access to technology, quality control and access to markets. However, what else is there to be done? 

The problem of registration

Registering a business in Sri Lanka has always been a long, tedious process; one that discouraged businesses and negatively impacted our ease of doing business ranking. However, in 2018, Sri Lanka was witness to some welcome reform with the launch of ‘E-RoC portal’, which streamlined registration, and brought the process completely online. This success in reform was reflected in the country’s ranking on the ease of doing business ranking and was hailed as a reform success. 

However, the E-RoC portal is only applicable to the registration of private companies. 

In Sri Lanka, the registration of private companies is governed by the Companies Act No 07 of 2007, while the registration of sole proprietorships and partnerships are governed by Business Names Ordinance No 06 of 1918. As a result, the E-RoC could not be broadened to include the sole proprietors and partnerships. 

97% of micro-businesses in Sri Lanka and 85% of small businesses have registered their business as sole proprietorships, with only 3% of the businesses surveyed having registered themselves as a partnership, and 2% registering themselves as a Private Limited Company.4 In other words, for the vast majority of micro and small businesses in Sri Lanka, their registration process is long, tedious and unnecessarily convoluted.

How does business registration work for sole proprietors and partnerships?

The process of registration is implemented by the Divisional Secretariats. At best, the country currently has nine different regulatory processes for the registration of sole proprietors and partnerships. The process of registering a sole proprietorship or a partnership in Sri Lanka is a time consuming, complicated task, with the main steps detailed below: 

1. Visit the Divisional Secretariat and collect form and instructions

2. Fill out the application

3. Provide documentation

   • Proof of ownership of business premises

   • Original Deed and notarised copy or

   • Original Rent agreement and notarised copy, or

   • No Objection letter from the owner of the premises

   • NIC copy

   • Tax assessment notification for the premises

   • Copy of the partnership business agreement

   4. Visit the Grama Niladhari and get the application and attached documents approved

   5. Receive additional approvals depending on the business type e.g.: PHI approval

   6. Hand over completed application to the Divisional Secretariat.

A majority of provinces do not have the application for business registration or the instructions sheet available for download from the Divisional Secretariat or Provincial Council website, and the instruction form is not always available in all three languages. 

This is in comparison to much simpler processes that have become standard internationally, and have also been replicated in Sri Lanka, as was seen with the E-RoC reform for private companies. 

Address the problem at hand

According to the island-wide survey conducted by the Advocata Institute, over 80% of respondents found the Grama Niladhari and the Divisional Secretariat to be an effective touch point. This would indicate that improving service at this point may not be an immediate requirement. Instead, focus should be placed on reforming the registration process for micro and small enterprises. 

Sri Lanka’s micro and small enterprises will have faced significant economic fallout during the curfew period. The Government has recognised this and responded with policy action like the debt moratorium to help ease some financial pressure. However, this is unlikely to be sufficient. These policies would only apply to entities that have registered their business and would leave the segment of unregistered businesses without support. It is vital that the registration process is streamlined, making it easier for these businesses to enter the formal sector and reap the benefits for formal sources of finance, and better access to markets that come with formalisation. There is a window for reform that exists, and we hope that the Government takes advantage of this to bring about some much-needed change. 

Treasury and Central Bank should consider credit guarantees for COVID-19 distressed bank loans

Covered in the Daily Mirror, Daily FT

By Fellows of the Advocata Institute

Even though Sri Lanka’s economy has opened up, businesses are still recovering from the dual shock of the locally imposed curfew as well as the global fallback from the coronavirus. A vast majority of Sri Lankan businesses are in need of support if they are to survive the next few months. 

The need of the hour is for liquidity support and enhanced access to credit. However, banks find this situation to be challenging. They need to be able to finance the loans that are being demanded but they also need to have some guarantee that their loans will not go bad. 

Will Central Bank’s solution work?

In response to this problem, the Central Bank has announced a subsidised credit scheme for businesses. Through this, the Central Bank will be offering a facility of Rs.150 billion to licensed commercial banks (LCBs), at a concessionary rate of one per cent. LCBs, in turn, will be required to lend to businesses at a rate of 4 per cent. 

Put simply, the Central Bank is essentially offering commercial banks a credit line to solve their issue of a source of financing this new demand for loans.  

Assuming that the bank’s marginal cost would be around one per cent, it is left with a contribution of 2 per cent before provisioning. Lending to this segment of businesses will be risky as many of these borrowers are already leveraged and do not have spare collateral to pledge. 

Under distressed economic conditions, non-performing loans could increase significantly. While part of the non-performing loans could be partially recovered, the impairment cost or credit cost could be as high as 6 per cent.  

If the net contribution to the banks is 2 per cent after their direct cost, a potential 6 per cent credit cost per year would mean a pre-tax loss of 4 per cent per year, creating the need for a credit enhancement or guarantee. 

This credit line means that the Central Bank is printing money to meet this requirement, leading to a monetary expansion. The risk of increasing money supply in the current economic context is that the subsequent pressure on the exchange rate will result in a depreciation of the currency. 

Looking at Sri Lanka’s import bill, 19.8 per cent of our imports are consumption goods and 57 per cent of imports are intermediate goods for production. The share of investment imports is also higher than consumption goods at 23.1 per cent. The impact of a depreciating currency will be significant on the economy’s ability to recover and grow. 

There are additional risks associated with this solution. A key problem is that while banks are receiving newly minted money from the Central Bank to finance the loans, the bank and the depositors have to take the credit risk on the lending. The collapse of finance companies in recent years shows what happens when deposit taking institutions take on risks that they cannot bear. 

Bad loans of Sri Lanka’s banks have been rising since the currency crisis in 2018 and the Easter Sunday bombings. The banks are already burdened with the credit moratorium that was also given in early 2020. In the first quarter of 2020, bad loans had risen to 5.1 per cent, which is the highest since the third quarter of 2014.

If banks collapse, the government may end up having to bail them out with capital injections. At the moment, Sri Lanka’s banking system is fairly sound and given the indications that bad loans will rise, all efforts must be made to keep banks stable.

Further complications

As highlighted by former Central Bank Deputy Governor and senior economist W.A. Wijewardene, the issue with excess liquidity already in the system, the problem is not about liquidity but the fear of default. According to Wijewardene, this fear of default could be tackled by a comprehensive credit guarantee scheme and smoothing out banks’ internal credit approval systems. 

Instead of using the CRIB reports for rejecting loans, a rating system could be used to eliminate the worst ones. If treasury guarantees are available, it may not be necessary to create new money and endanger the balance payments. Banks may be willing to make loans from their own deposits if there is a guarantee. 

There is also a moral hazard associated with this decision. This crisis hit at a time where there was significant pre-existing distress in the economy, there is the possibility that this financing will be utilised to keep ‘zombie entries’ alive. Additionally, this would prevent resources from being allocated to productive and efficient firms. What is needed is quick support for viable companies to get their business going. Steeply subsidised credit may induce businesses to go after loans that are not needed and refinance other loans, which are at higher rates. Or whenever they have the cash, the incentive will be to settle the higher cost loan than the low-cost one, inviting default or delays. The artificially low rate of interest of 4 per cent for working capital also may create other distortions. 

A working solution 

Given a challenging environment, if the authorities want to direct banks to give loans, the government will have to share the risk. Ideally, the credit risk should be split three ways between the government, multi-laterals and banks, to ensure that they have skin in the game. The worst-case scenario would see the banks with a potential zero profit from this scheme and not the alternative of sustaining heavy losses, incentivising the banks to lend.

Guarantees could also be structured to give high credit cover to smaller firms and lower amounts to large firms, as it may not be necessary to give all borrowers the same amount of credit cover. 

For instance, loans up to a million rupees for very small firms could be covered by a 100 per cent guarantee, loans from 1 to 10 million by a 90 per cent guarantee, from 10 to 20 million, 75 per cent and loans above 20 million to 50 per cent or a similar suitable share of risk. Of course, this solution is not devoid of risk. This would allow the LCBs to meet the demand for the loans, with the guarantee offered by the government.  

Blaming the banks: Why a credit guarantee is better

In this weekly column on The Sunday Morning Business titled “The Coordination Problem”, the scholars and fellows associated with Advocata attempt to explore issues around economics, public policy, the institutions that govern them and their impact on our lives and society.

Originally appeared on The Morning

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By Dhananath Fernando

The Central Bank of Sri Lanka (CBSL) is in the spotlight yet again. Questions have been raised as to whether the CBSL and the banking system have been provided sufficient facilitation to contain the health crisis (that has been contained successfully at the moment) which led to an economic crisis.

The Government announced a series of economic relief packages since the beginning of the Covid-19 pandemic, including a Rs. 5,000 allowance for the most vulnerable sections of society and for the rescheduling of leases and loan facilities. Currently, the discussion is not on what the relief measures are, but rather on how we can execute them in the right way or whether we have better alternatives.

First, let’s understand the context. The CBSL offered a Rs. 50 billion refinancing facility in March, which was then increased to Rs. 150 billion in June. By the time the second scheme was announced, Rs. 27.5 billion of the original Rs. 50 billion had been given out. The CBSL offered the Rs. 150 billion credit facility to licensed commercial banks (LCBs) at 1% interest where the banks have to provide 4% interest to their customers affected by Covid-19.

Additionally, the CBSL brought the Statutory Reserve Ratio (SRR) to 2% from 4%, increasing liquidity (availability of money) in the market. The deposit that needs to be kept at the CBSL by banks as a percentage of total deposits is called the SRR. This means that when a customer deposits Rs. 100 in any LCB, the respective LCB has to deposit Rs. 2 to the CBSL which will not be paid any interest. Earlier, the banks had to deposit Rs. 4 and now it has been brought down to Rs. 2. As a result of this decision, out of the total deposits of all LCBs in Sri Lanka, 2% has been released to the market. That is depositors’ money.

The process of getting a working capital loan for a business is as follows: The businesses can apply for working capital loans from their respective LCBs and upon their approval, they send the application to the CBSL and the CBSL provides the money from the credit line they established, which is Rs. 150 billion. The CBSL provides money to LCBs at 1% and they give the loan to customers at 4%. The main question is how the CBSL got Rs. 150 billion in the first place. That was through money printing or money creation.

Additionally, banks now have more money from the reduction of the SRR, which can be used for other investments, to provide credit facilities, or as a deposit at the CBSL to earn an interest. The CBSL offers a 5.5% interest to LCBs parking excess money at the CBSL, which is called the Standing Deposit Facility Rate (SDFR). The CBSL has a similar facility where LCBs can borrow money if they run short of money, which is called the Standing Lending Facility Rate (SLFR) which is at 6.5%. A few challenges we may face in the future in this context are outlined below.

Challenge 1 – refinancing previous loans

When a loan scheme is available at a 4% concessionary rate, there can be instances when unnecessary loans will be applied for, to settle previous loans which have been taken at a higher interest rate. In the overall system, it may indicate that the CBSL and other banks have provided adequate loans under the newly established credit facility for Covid-19, but the ground reality may be that many businesses who have a solid working relationship with banks and bank managers will refinance their previous facilities.

The same has been experienced in large-scale loans under the previous Government’s Enterprise Sri Lanka loan scheme. It was reported that some established companies incorporated new companies just on paper to get the concessionary loan to refinance previous facilities. It was alleged that the majority of politically connected individuals received the loans and in most cases, the loans were canvassed to known businesses by bank managers themselves, avoiding customers who truly had financial needs. For bank managers, it is safer to provide a loan to a known business entity with a track record and good relationship, rather than taking a risk in a challenging business environment and risking underperformance in bank manager/branch key performance indicators (KPIs).

Challenge 2 – risk of market distortions and increasing expenses in CBSL

Since the CBSL pays 5.5% on deposits by the LCBs, banks have a higher incentive to simply earn a 5.5% interest with minimal administration cost, rather than providing a loan facility at 4% for the customers with a 3% interest margin, which also requires a significant amount of administration work. The banks will most likely park the excess money they received from the SRR cut and deposit it at the CBSL. This would increase the interest expenses for the CBSL. LCBs may also consider investing the excess money in bonds and other investment instruments which may distort those markets as well.

The positive side to this is that since banks park their liquidity back in the CBSL, the risk of inflation due to excess liquidity is somewhat minimised, but it will not bring the expected economic revival post-COVID-19. The non-performing loan (NPL) percentage has already increased to 5.1% as business recovery was very slow even before the Covid-19 pandemic, due to the Easter Sunday attacks. Similar concessionary loan facilities were provided to businesses impacted by the Easter attacks and it is highly likely that NPLs will increase.

As a result, banks may have a natural reluctance to provide facilities as they have a lucrative and stable option available without risking depositors’ money. The CBSL may push banks to provide loans as much as possible due to the lack of a correct incentive structure, which will lead to an impact on the stability of the banking sector and result in loans not reaching the right target audience.

Challenge 3 – pressure on LKR compared to USD and foreign currencies

By the time the CBSL announced the SRR cut and the Rs. 150 billion credit line, there was about Rs. 223 billion excess money in the financial system. The problem was not a lack of money (liquidity) in the financial system but the reluctance of banks to absorb risk to provide the facility to the impacted customers. At the same time, the mechanism of dispatching loans was not efficient and all banks were just depending on the Credit Information Bureau of Sri Lanka (CRIB) without having a risk-based credit assessment system to determine the borrowers’ ability to settle the loans and offering different interest rates based on the risk assessment. Additionally, the delays in banks’ internal approvals may not be supportive, given the urgent need of facilities and higher demand.

Now, as a result of excess liquidity, inflation may increase and the Sri Lankan rupee (LKR) will face further pressure to depreciate, leading us towards a Balance of Payments (BOP) crisis. Bringing the SDFR and SLFR down will bring down all interest rates in the market which will result in more money (liquidity) in the market, adding further pressure on the LKR.

In summary, the reluctance of banks to take the risk to provide loans in a challenging environment by risking depositors’ money is the problem, not the lack of liquidity in the market.

A workable solution

It is challenging to find an ideal solution for very complicated problems as our economic fundamentals have not been good for decades. Most variables are interconnected so we have to make a compromise in one of the areas. As the problem is not the lack of money supply, but rather the banks’ reluctance to take risks with regard to loan recovery, a credit guarantee by the Government could have been the first line of solution. That would minimise the risk taken by the banks without adding excess liquidity to the market and distorting other market sentiments.

Ideally, the Government credit guarantee has to be backed by a foreign funding line (USD funds) and this column has been promoting the idea of a bilateral loan with a neighbouring country or active engagement with the International Monetary Funday (IMF) for a fund facility, given the international sovereign bond settlements starting from October. The government guarantee can be provided on an agreed ratio where small loans are fully guaranteed by the Government and for bigger loans, the bank and the Government share the risk, where early instalments first cover the risk of the bank and their depositors.

One bottleneck for the Government in providing a credit guarantees scheme is the past mistakes made with our state-owned enterprises (SOEs). Multiple back-to-back credit guarantees have been provided to colossal loss-making SOEs like SriLankan Airlines, Ceylon Petroleum Corporation (CPC), and the Ceylon Electricity Board (CEB). Successive governments turned to these last resorts very early to fund completely unnecessary operations and now, faced with a real crisis, we have run out of solutions.

However, in a recent interview, Dr. Nandalal Weerasinghe mentioned that the Treasury wanted to create money and support businesses instead of providing a government credit guarantee. The reasons for these instructions are yet to be clarified by the Treasury. However, Dr. Weerasinghe has alerted the potential risk of excessive money printing on banking sector stability.

When the Easter Sunday attacks impacted the economy, we never expected a global-level pandemic of this scale. The lesson is that we should not underestimate the possibility of similar pandemics and market disruptions with climate change and a dynamic global environment in the future. I sincerely hope that there will be no calamities for the next few years as there is a lot we all have been hoping to achieve for decades.

The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.

SOE sector: Promises of change on the horizon?

Originally appeared on Daily FT

By Maleeka Hassan

With the harsh reality of a global recession slowly descending on Sri Lanka, questions about Government expenditure and its allocation of resources have begun to dominate dinner table discussions. Fears of higher taxation to cover the losses earned and to sustain the blows from the impending recession have started to emerge.

There is a simple solution: introduce reforms to prevent areas for corruption and inefficiency within SOEs – thus preventing the State from bearing tremendous losses. However, there is hesitation and discomfort amongst the general public, when consolidation or privatisation of SOEs are discussed. This begs the question: why?  

Why are SOEs so popular amongst the public?

One of the reasons could be due to the portrayal and framing of the SOE sector, over the years. SOEs are perceived by the public as a source of stable employment as well as a source of goods and services at affordable prices. This perception is backed up by the fact that the SOEs hire over 200,000 people; framing the sector as ‘people-oriented’ over ‘profit-oriented’, with no consideration given to the losses sustained by these entities. Moreover, privatisation is often viewed in the same light as capitalism: cold, hard and unforgiving.

This perspective could be propelled by our history with the SOE sector. In the 1980s, the incumbent Government was pushed to reform the SOE sector. This was due to SOE products struggling to remain competitive amongst imported substitutes and therefore turning to the State to fund and sustain most of them. In addition, foreign aid agencies lobbied the Government to adopt a privatisation programme in order to secure external aid. However to avoid backlash from labour unions and state employees, the media and other campaigns around the policy were careful to avoid associating the policy with employee redundancy. Privatisation was concealed by the word ‘peoplisation’, and involved providing 10% of the shares to employees from former public enterprises.

Another reason behind the immense support for SOEs could be due to their heavily subsidised products. However, when products are sold below cost, the cost is still indirectly borne by taxpayers in the form of higher taxes, to recover the loss. The belief that privatisation will result in the prices of goods rising is contingent upon the creation of a monopoly. However, with the reduction of red tape and appropriate measures taken to prevent anti-competitive practices, prices may reduce or remain the same in a competitive market. An example of this was the conversion of Sri Lanka Telecom to a public company. This resulted in an improvement of internal operational efficiency and the number of new connections provided increased from 72,457 in 1997 to 143,075 in 1998.2

A similar reason that may have contributed to shaping current public opinion that SOEs are most effective at serving the people when they remain public, was the introduction of ‘The Revival of Underperforming Enterprises or Underutilised Assets Act’ of 2011 (also known as the Expropriation Act). This is where 37 businesses that were classified as ‘underperforming and ineffective’, were nationalised – suggesting to the public that privatisation wasn't always effective and ideal. However, these attitudes may be fuelling the problem.

Why are these perceptions wrong?

By utilising the narratives above, certain SOEs and officials attached are able to conceal corruption and nepotism behind the idea of employment, and ‘helping the people’. An example of this is the Sathosa scandal that emerged earlier this year, relating to 67 files that tied Sathosa to controversial transactions, such as land deeds that were purchased under various names and involved hundreds of acres, that cost the State billions of rupees.

Similar instances of bribery are easily carried out, and go unrealised, due to the absence of monitoring and oversight of the rest of the 524 SOEs that are ‘not essential’. The lack of transparency with regards to the financial reports of the SOEs makes it easier for these companies to commit such acts. In the Annual Report for 2019, published by the Ministry of Finance (MOF), only 14 SOEs had submitted their Annual Reports for 2018 out of the 52 that are monitored by the MOF and Public Enterprise Department (PED). Even more worrying is the fact that 21 out of the 52 companies hadn't submitted their 2017 Annual Reports either. 

Despite the introduction of the COPE reports and the appointment of the Department of Public Enterprises (PED) to monitor the operations and efficiency of SOEs, the SOE sector continues to amass tremendous losses. The recently published Annual Report by the Ministry of Finance estimates a total loss of Rs. 151,439 million from the 52 essential SOEs for 2019 based on provisional data.

These numbers would change drastically if they included data for the rest of the 524 SOEs (which include subsidiaries and sub-subsidiaries that have been gazetted but are not monitored by the Ministry of Finance, due to them not being ‘essential). The opacity of this sector would usually raise alarm bells amongst the Sri Lankan public if it was occurring anywhere else – and yet it doesn’t with SOEs. change drastically if they included data for the rest of the 524 SOEs (which include subsidiaries and sub-subsidiaries that have been gazetted but are not monitored by the Ministry of Finance, due to them not being ‘essential). The opacity of this sector would usually raise alarm bells amongst the Sri Lankan public if it was occurring anywhere else – and yet it doesn’t with SOEs.

Evolving circumstances propelling change

Despite these concerning particulars, there may still be hope on the horizon. The manifesto of President Gotabaya Rajapaksa indicated that whilst privatisation was not up for consideration, consolidation was still an option. Additionally, a board was appointed to select the heads for loss-making, inefficient SOEs, in order to reform and improve such entities.

More importantly, however, is the question of SOEs in a COVID-19 economy. 

With predictions for Sri Lanka’s estimated real GDP (percentage change) for 2020 amounting to -0.5 due to COVID-19, some economists predict that large scale reforms may be introduced in order to improve efficiency and increase its global competitiveness when seeking foreign direct investment and increased capital inflows. These reforms may extend to the SOE sector – in order to improve the financial accounts of the country and to reduce room for corruption and bribery.

What reforms can the Government adopt?

Reform of SOEs, focusing on underperforming entities, in particular, could create some much needed fiscal space for the treasury. The first phase of reform would be improving governance and accountability in SOEs. The Government should compile a comprehensive list of all SOEs; at present, the Government only tracks the financial of the key 52 entities. This should be expanded to include all entities. Clear reporting guidelines for SOEs should be introduced and enforced, with COPE and COPA strengthened to improve accountability. If these reforms are adopted, the SOE sector will increase productivity and efficiency immensely, saving the Government and the average taxpayer – millions of rupees.

The second phase of reform would be on the consolidation of SOEs. Of Sri Lanka’s 524 SOEs, the Government recognises only 52 of these as strategic or key entities. In line with Government policy, underperforming, non-strategic SOEs should be identified for a consolidation plan. 

This may be the golden window of opportunity to reform and improve the transparency of the sector, but if missed – may not come again for a long time. 

The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.

The ingredients of a ‘system change’

In this weekly column on The Sunday Morning Business titled “The Coordination Problem”, the scholars and fellows associated with Advocata attempt to explore issues around economics, public policy, the institutions that govern them and their impact on our lives and society.

Originally appeared on The Morning

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By Dhananath Fernando

The mandate given by the people of Sri Lanka to His Excellency Gotabaya Rajapaksa can be interpreted in multiple ways. All interpretations funnel down to a single insight: Change the system. The word “change” is powerful. However, “change” is difficult to execute. In contrast to setting up things from scratch, altering an existing system is not an easy task under any circumstance. 

The President’s desperation is clear. He has been given a mandate to “change the system” in five years; of which, seven months have passed. With elections coming up, it seems that it will take almost 10 months to really get to the starting line. In other words, the existing “system” itself has pushed the man in charge of “system change” to the wall and the clock is ticking.

Last week’s column discussed the systems that need change and how the President could start. We highlighted that state-owned enterprises (SOEs), public transport, land reforms, and e-courts would be the four big aspects that can be implemented with minimal capital investment. If the President succeeds, the people of Sri Lanka will be able to witness a considerable change in their standard of living, and it is important that the opinion leaders support this system change in a democratic framework, and leaders at the frontline make sure the changes take place within the same framework.

Today, let’s explore a few insights on how to execute a system change. 

Understanding the system

If you ask the common man: “How can we change the system?”, a popular answer is that we can do it by imposing strict laws and regulations. Some believe the leader has to be firm and critical and supervise their team closely.

While the aforementioned is true, a sustainable system change requires the establishment of three main components: (1) ownership of the system, (2) incentives and rewards, and (3) accountability and capable people who drive the system.   

If you look at the current inefficient system, it is completely faulty due to many factors. The incentives in most government institutions and systems promote inefficiency; a system where work is delayed, and individuals are paid overtime to reward that. 

Take our judiciary system for example. In most instances, lawyers charge their clients based on the number of appearances, so the incentive is to have more appearances. Therefore, postponing cases is common and as a result, the average time taken for contract enforcement is 1,318 days with 22% of claim value. There is no pressure to finish a case within a stipulated time frame, so there’s no accountability and monitoring. 

At the same time, there is no ownership for the system as individual performance is not measured and no one will be questioned on the delays in procedure. Imagine a scenario where you hire a mason bass for a small-scale construction project at a daily rate, but you fail to monitor his work. The obvious result would be that the work will go for months, making the system completely inefficient. 

Ownership of the system

Any successful system runs on the ownership of risk. A main reason investors want to engage in businesses is because they have invested risk in the form of money, reputation, time, etc. This means they have an ownership stake and an interest to recover what they invested. For a system change, the upcoming government and President are required to consider engaging people who invest risk in the form of money, reputation, time, etc. and provide them with the opportunity to own the system as well as the results of their action.

Public-private partnership (PPP) is a great model to consider and many forms of PPPs are available and it just requires detailed attention. This would be a fundamental factor in changing any system. 

On that basis, the appointment of the ministerial portfolios’ board for SOEs cannot be just a blanket appointment – an ownership of risk has to be associated with it. In implementing large-scale projects, the President advised a few months ago, to explore acquiring investment from the private sector instead of taking loans and expanding debt stock. That means getting private investors to invest their money (risk) in projects which they can recover through profits. 

The Government can incorporate similar practices to a range of sectors. The government sector is too large, from managing airlines to managing cashew production. It will be difficult to bring private risk ownership across the board, but we can roll it out on a priority basis. Until we get the election results, time can be spent on setting up ownership structures for key institutions and a mechanism on how they can invest risk into the system. The structures have to differ based on the sector and on the type of the business and service model. Take our President for example, who has an ownership of the trust of 6.9 million people where he has invested risk. Hence, he is under pressure to deliver results. Shouldn’t the same be applicable for the rest of his supporting divisions?

Incentives and rewards

Setting up the correct incentive structures and rewards is the second important factor in a fluid system change. The current incentive structure is driven by inefficiency and corruption. Regardless of whether you perform well or underperform, you get the same benefits. So no one has an incentive to take things into their hands and do it differently. The recent discussion on the Central Bank is a good example. Whether the Central Bank maintains monetary stability, regulates license banks and non-banking financial institutions (NBFI) in the right manner or not, their destination won’t change. 

Incentives can be negative and it should not need to be positive always. If there had been a positive or negative incentive structure bearing on salaries of bureaucrats on maintaining the stability of NBFIs, I am certain they would have taken matters more seriously instead of waiting for some financial institutions to collapse completely (institutions need to provide the necessary legal authority to regulate effectively). Having regulations without incentives is a sure way of not fixing the system. 

If you are surprised by the friendliness and politeness of hotel staff, it is not just because they were asked to do it or not because the management installed CCTV cameras, but it is because they receive a financial incentive for being friendly. At the same time, we should not misinterpret that the hotel staff is kind and pleasant just because of the financial incentive. The fact that their genuineness is incentivised, which in turn makes system efficiency sustainable, is the bottom line.

Accountability and people 

Checks and balances have to be maintained if we are to monitor and evaluate the incentives and ownership of risks. That is where “accountability” and the people who drive “accountability” matter. If we have the accountability structures, we can make decisions based on meritocracy.

For example, most of the SOEs haven’t produced their annual accounts or annual reports. Most of these institutions do not even have a website. Most of the institutions that have a website have only updated the welcome message by the newly appointed minister. 

The people who drive reforms have to make a significant contribution. However, we have to keep in mind that the people-driven regulatory model where a system change is driven by personality and personal charisma has a shorter life span. But without the right people, it would be difficult to drive a system change.

We need people who can drive the system to overpass their personal charisma, so even without their presence, the system starts to function. The next government will have the challenge of identifying the right people who can fix a system rather than just pushing on getting daily operations done.

For the right people who have been identified to change the system, the broader mandate is straightforward; identify ownership structures, identify incentive systems, and set up accountability procedures are the main mandate. We should not confuse the skill of “changing the system” with project management skills. “Changing the system” is a unique visionary sport. There could be good project managers, but transforming to a system change goes far beyond project management, although it has some components of project management. 

System changes are not popular

We need to remember that system changes are not popular. Most of the people who demand a system change are usually beneficiaries of the inefficient system. Changing the system will have a direct impact on them and resistance may come with it. That is why the transferring of ownership of risk comes to the forefront when looking to change the system. 

It is important that we learn from past mistakes. The previous government too received a mandate for a system change to establish rule of law, but the same people who gave them the mandate decided to pick a different regime, again, pretty much on the same promise, that is to “change the system”.

Ownership, accountability, and the right people who could drive system changes were not in charge of policy implementation during the last Government; all were preoccupied with micromanagement without looking at the bigger picture or considering rapid implementation.

Policy statements of the main leaders of the Government went in two different directions, as did the heads of ministries and their officials.

The Vision 2025 policy plan was introduced a considerable time after taking office. The policy statements on institutions were contradictory and as per media reports, and the basic composition of the security council was questionable. 

System changes are visible, and people will experience tangible differences, such as in the government balance sheet. There will not be a better time than one of crisis to engineer a system change – we should not waste this opportunity.

The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.

Professor Deepak Lal: Departure of a Free Market Champion

Originally appeared on Economy Next

By Sarath Rajapathirana

On the night of Thursday the 30th of April 2020, Professor Deepak Kumar Lal passed away in London after a brief illness. Thus ended a remarkable life journey as a celebrated intellectual and thought leader.

An author of highly acclaimed papers and books, a professor with a stellar academic career in two continents. Economic adviser to Governments for over 55 years. His observations went beyond book learning to be actually engaged with policymakers from many countries including the United Kingdom, India, Sub-Saharan Africa, Japan, Sri Lanka, Philippines, Brazil and Russia. While there have been many been appreciations and remembrances of Deepak in India, UK and the United States, one missing aspect of his life was his scintillating conversations with his friends and associates in three continents who will miss him sorely.

Deepak the Person

Those who associated with him closely would bear witness to his contributions as a great conversationalist. His vast knowledge of economics, history, and political science, sociological explorations in his quest to understand how economies and societies worked in the broadest possible ways made him great company. He was not inhibited by researching ancient history or in praising empires.

His astonishing knowledge, gentle ways and ability to analyse and advance economic issues set him apart from many academics. He was one of the more well-read individuals. He was always up to date on world politics, newest contributions to economics. He was a voracious reader, reading into the early hours of the morning, even when he had returned home past midnight. He read everything from learned research papers, novels to articles in leading newspapers of the world. His monthly column in the Indian Business Standard was read internationally.

In this essay which is short compared to his vast presence in the economics literature, we capture the most important and salient aspects that have helped many economists including us, to refine and change our world view on economics and economic policymaking.  The best description of Deepak is that he is a classical liberal. And, one who had made formidable contributions to free-market economics and its importance to specially help developing countries to grow faster, reduce poverty and improve income distribution.

Status Quo in Economic Thinking for Developing Economies

In the 1950s, thinking on economic development was influenced by the two main sources. These were the Soviet model and the other the ideas of Latin American structuralists. (Excluding China which claims to practice socialism with Chinese characteristics). The Soviet model was adopted by India for two important reasons, free-market economics was associated with British imperialism and the ideological position of the Indian leadership led by Pundit Nehru.

The Soviet Union was seen as “India’s ally and implicit role model” “(Srinivasan and Tendulkar 2003). In the case of Latin America, its colonial past was a century ago. Its leadership followed the Soviet model too,  implicitly with the special characteristic of being “ structuralists” implying a rejection of the price mechanism under the influence of a few British economists, especially from the University of Sussex, such as  Dudley Seers, Hans Singer and Latin American economists such as Celso Furtado and Raul Prebisch of Brazil and Argentina respectively.

A common issue with the followers of the Soviet model and structuralists was their failure to grow (referred to as the “Hindu rate of growth” of India, partly pejorative characterization by RajKrishna (1978). Mainstream Indian economists in the 1950s were planners, deeply suspicious of the free market. They were influenced by Mahalonabis a leading Indian scientist and statistician who postulated that in order to raise domestic consumption in India, it needed to invest in capital goods based on what was called the Feldman-Mahalonabis model. Moreover, the approach was to use a closed economy model with high import barriers to promote industrialization.

Deepak Lal’s Contributions

Deepak’s contributions which took on the above sources of dissent against free-market economics were more credible following the collapse of the Soviet economy in 1989, the poor growth rate of India the largest economy following the Soviet model and the sheer failure of economic policies of the Latin American structuralist school that led to high inflation and low output growth.

Deepak was in a group of world-class economics Professors such as I.M.D little, Maurice Scott, and Max Corden at Nuffield College, Oxford University.

They were critical of the planning approach to economic development and for the exclusion of the price mechanism to allocate resources. Interventions were justified in the presence of externalities in which case free markets could under-produce goods and services.

But even here there were better ways of intervening on externalities and infant industry grounds.
This particular group was well versed in economic theory, its application in developing countries and had practical experience in working on developing countries.

There are four books among the 40 books and pamphlets he had written that putDeepakat the top tier of economists who have advanced the case for free markets in developing countries.

They are ‘The Poverty of Development Economics’ (1983), ‘The Hindu Equilibrium’ (1989). ‘Poverty, Equity and Growth: A Comparative Study’ (with Hla Myint) 1999 and ‘Against Dirigisme’ (1994).

It would be important to provide a context in which Deepak advanced his ideas on free-market solutions for developing countries’ economic challenges.

The majority of mainstream economists in the 1950s to 1970s argued for planned economic development.

India was the leading light for most economists in the developing world. And, to buttress this position India’s leading scientist turned statistician and member of the Planning Commission, Mahalonabis had shown that in order to raise levels of consumption in India, it had to make investments in the capital goods sector based on the Feldman-Mahalonabis model.

And, the Planning Commission espoused this position in Indian plans, particularly in the second five-year plan, creating heavy industries, with little regard to rates of return or the possibility of producing iron and steel products that could compete in the world market.

Most Indian economists at the time believed that India’s large size (both in geography and population) justified producing for the domestic market.

Taking the view of a closed economy was consistent with the Socialist model espoused by leading politicians such as Pandit Nehru a Fabian socialist who favoured Soviet-style planned development.

On the other hand, Gandhi’s ideas were to support self-sufficient village-based economies where 83 per cent of the Indian population lived in 1950. In effect, both models were closed economy models protected from foreign competition.

Deepak wrote powerful critiques of the status quo thinking on economic development prevailing at the time beginning with ‘The Poverty of Development Economics’ first published in 1983 but revised and expanded in 1997.

It provided a robust critique of the statist model of development which denigrated both trade and free markets. He argued that the death of this dogma would be beneficial to the economic health of developing countries.

The history of the last thirty years has vindicated the veracity of Deepak’s critique. The dogma in its old form has gone.

However, he showed it in a postscript that brings the original text up to date, both in terms of statistics and in terms of the history of ideas.

Nevertheless, as he warns, dirigiste tendencies have not disappeared totally, but are emerging in new guises in the wake of the CORVID 19 epidemic.

Early calls for protection have arisen in countries like Sri Lanka. Ominous signs appear with the Central Bank of Sri Lanka banning many imports on the claim that it was necessary to address the balance of payments problems, ignoring the distortions in resource allocation that it would create. And the economy becoming non-competitive as a result.

Some policymakers casually suggest that Sri Lanka should adopt such a policy. This would cause a bias against export production since resource allocation is influenced by relative strengths of incentives. Besides, limiting imports would raise domestic prices of these goods and lead to inefficient import substitution not being subject to foreign competition.

In Deepak’s multi-country study with Hla Myint on ‘The Political Economy of Poverty equity and Growth: A Comparative Study’, they used a counterfactual approach of “twining” countries with similar resource endowments.

Sri Lanka and Malaysia both of which were British colonies and both had large plantations, one of the seven paired country studies. In the case of Malaysia, a mining export sector coexisted with a peasant rice economy.

The expansion of the plantation and mining sectors in past centuries attracted large numbers of immigrant Indian and Chinese workers and created plural societies composed of different ethnic groups with different cultures and traditions.

Native Malays were designated as “bumiputras” and have preferential treatment in securing public sector jobs and access to credit. However, despite this common background, (except for ethnic preferences) these two countries have had very different experiences in economic development since their independence.

Malaysia achieved unusually high growth rates but had trouble with equity and employment creation being relatively more market-friendly policies than Sri Lanka. However, Sri Lanka did well on equity by maintaining its culture and heritage, but its market unfriendly economic policies before the1977 liberalization created problems with productivity growth and balance of payments difficulties. Consequently, there was virtual economic stagnation by early 1970.

Deepak and Hla Myint and their associates point to the constraints within which governments made policies and they sought to evaluate the origins and validity of these constraints.

In the case of Sri Lanka, the departure from free-market policies through high import controls led to low GDP growth. Without the high growth, the Government of Sri Lanka (GOSL) could ill afford to subsidise its large social expenditures without straining the Government budget.

Important reasons why Sri Lanka could not achieve high growth was its high protection, large inefficiency and losses of state-owned enterprises that stood in the way of raising productivity growth. However, the analysis of both these countries underscores the importance of free-market policies as a solution to raising productivity growth which generally accounts for more than 50 per cent of the overall growth rate in worldwide studies.

Deepak’s masterly two-volume ‘Hindu Equilibrium’ deals with cultural stability and economic Stagnation in India over millennia in volume I and aspects of Indian Labour in volume II. They lead him to trace the origins of present India’s present status as a predatory and dirigiste state.

Bringing culture and standard economic analysis, he comes to these conclusions. It is the neo-classical framework that allows him to examine phenomena over three millennia. And, then come to the conclusion that India has to change its course by adopting a free-market approach to reach and sustain high rates of economic growth.

The very high growth rates achieved following the 1991 reforms in India vindicates the position taken by Deepak in this work.

‘The Repressed Economy: In this outstanding collection of essays on economic liberalization, Deepak lays the claim to be one of the world’s leading development economist. He questions why many developing countries have followed policies which have retarded both growth and achieving equity, before discussing why and how these policies need to be reversed.

‘The Repressed Economy’ brings together Deepak’s most important work on economies that function unsatisfactorily because of government policies that distort the working of the free market. He explains both why governments create these distortions and when, if at all, they are likely to heed the technocratic advice of the economists to eliminate or reduce them.

The theme of the repressed economy is explored throughout these essays, include applied studies of developing economies in Asia (China, India and the Philippines), Africa (Kenya), and Latin America (Brazil).

The role of ideas, interests and ideology are explored, as is the importance of differences in initial resources are discussed in this book of essays. Simple political economy models are developed to explain the actions of the governments concerned.

An intellectual biography is included which outlines how Deepak’s practical experience in the Third World led him to become a free-market-oriented development economist.

Conclusions

First, even a limited survey of Deepak’s contribution as above shows the wide breadth and depth of his work on development. No matter whether countries are large or small, with different factor endowments and locations, the successes and failure of their efforts depend on the type of development strategies adopted, whether they are market-friendly or not.

Second, the wide scope of the studies using simple analytical tools show that free market-based approaches to economic management can bring greater success than the alternative of heavy economic interventions. The opportunity costs of failure are high in terms of low growth rates, limited equity and skewed income distribution outcomes.

Third, Deepak notes that dirigisme has not been totally eliminated and that it can raise its ugly head again with the anti-openness attitudes engendered by the likes of CORVID-19.

Finally, noting his total contributions to economic development, Deepak has made honest and brave contributions to our understanding of economic development.

Witness his delving into economies that go back to 3.5 millennia and his praise for some empires that led to better institutional arrangements as found in the former British colonies that left behind sound legal frameworks regulatory institutions and even partial democracies.

Bibliography

T.N.Srinivasan and Suresh D. Tendulkar ‘Reintegrating India with the World Economy’ Institute for International Economics, Washington D.C 2003.

Deepak Lal,’The Poverty of Development Economics’, Hobart Papers 16, Institute of Economic Affairs, London 1983.

‘The Hindu Equilibrium Volume’. 1 and Volume 2, Clarendon Press, Oxford 1989.

‘Against Dirigisme’, The Case for Unshackling Economic Markets, International Centre for Economic Growth, San Francisco CA: ICS Press, 1994.

Hla Myint, ‘Political Economy of Poverty, Equity and Growth – A Comparative Study’, Clarendon Press, Oxford 1996.

The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.